Divorce And Your Mortgage
How to start again
Starting again after a marriage breakup is tough, both financially and emotionally. Most married couples co-own their home, so in the process of the divorce, at least one partner needs to find somewhere else to live, and you both need to draw on the equity in your current home to start again. Most divorcing couples go through a property settlement to establish how their assets should be divided, and this includes the family home, and other shared properties.
So, what are your options?
Sell the home
This option offers a clean new start for both of you. Sell the home and split the equity, so you can both start again. You need to discuss how to manage the mortgage payments up until the house is sold, but after that point, you are both financially free of each other. However, starting fresh can be challenging if there is not much equity in the home, so you may have to prepare for a long slow journey to reach the same level of financial stability.
Buy out your ex-partner
If you have children, it’s more likely that you will want to keep the family home stable for them. You can buy your partner out of the mortgage, removing them from the home loan, although this would entail that you are financially strong enough to manage mortgage repayments on your own. In order to qualify, you must already have a good repayment history on your current loan and you must have adequate proof of income to demonstrate that you can continue making mortgage payments. There must also be enough equity in the home to refinance. This can be a challenge if the value of the home has dropped since you purchased it.
If you do qualify, you can refinance and extend the mortgage, which will probably involve changing your home loan to one that is more suited to your current situation. When you transfer equity, you do not need to pay stamp duty.
Transfer your mortgage to your ex-partner
If you choose to let your ex-partner keep the family home, your partner can buy you out in return for taking your name off the home loan and property title. You can use this money to purchase your next home.
Keep the mortgage intact
Another, less popular option is to keep the mortgage intact, with both of you remaining equally responsible for making mortgage payments. This is a good option for “nesting” parents, who take turns living in the home with the children; or if the partner staying in the home cannot meet the financial criteria for refinancing. The hazard of this option is that one partner might fail to honour their share of mortgage payments, putting the ownership of the home at risk. If you choose this route, you should have a back-up plan in case the agreement turns sour.
Talk to the experts
Whichever path you choose, you will need to talk to a financial expert about whether you need to pay capital gains tax or whether you are eligible for CGT rollover relief. As your financial situation has drastically changed, you will also need to talk to a mortgage broker about refinancing the family home, or alternately, securing a new mortgage with the money you received from selling or transferring the former home.