How to manage your mortgage after you and your partner split
There'll be more divorces as a result of COVID-19, if you believe the experts, and mortgage brokers are already seeing an increase in couples trying to work out what to do with their property once they've separated.
Rebecca Jarrett-Dalton, founder of mortgage broker Two Red Shoes, says that unfortunately handling divorce and mortgages has become an increasing part of her Sydney-based business.
She says there's no one-size-fits-all approach to working out how a mortgage will be handled in a divorce. However, the most important thing to do
is talk through solutions with a professional before making the final agreement.
This can include calling your bank's or lender's hardship team straightaway and letting them know what's going on, and they can advise you on your options. She says couples may decide to split the funds in their individual accounts but freeze any joint accounts such as the home loan redraw.
Often she finds clients have already made an agreement, but if they haven't "we can plant the seeds" for better solutions that the divorced couple might be thankful for in 10 years.
Talking to a professional adviser can also help both partners financially in the long term. For example, it may be beneficial to take on the family home when you factor in the stamp duty costs or real estate agency fees of going into a new property. She's seen cases where people have avoided $60,000-$80,000
Anna Hacker, national manager at Australian Unity Trustees Legal Services, says if the divorce is amicable, there are lots of things that can happen because people are talking to each other.
"They can negotiate with a bank if they've got separate finances at that point. I've seen people that have continued to have the mortgage together
and it's not that uncommon," says Hacker.
She says financial institutions won't always focus on both names on the property title and it becomes trickier if one person is remaining in the property.
There are many cases where people continue living under the same roof, too. If that's the case, there's less of a need to deal with the property immediately.
When couples are not communicating properly or there's more tension in the room, Jarrett-Dalton says this is when poor financial decisions can be made.
"There might be one partner who gives up and says, 'I'll give them everything,' and they get out of there. That can mean passing over all the assets or they'll take on all the debt just to get out of the situation," she says.
The "do whatever it takes" attitude is not always the best one because there might be better options, even if it means taking over the other person's responsibilities.
"Someone might be walking away with a car and feel they've got the better deal. But they're not doing it with eyes wide open," says Jarrett-Dalton.
Hacker says there are also situations where assets are tied up with businesses. The business may have a loan that was guaranteed by the property or the property was security and that becomes difficult to untangle. Financial stress might have led to the end of the relationship.
"Suddenly there's a debt on a house that there wasn't before because of an issue with a failing business. One party might be bankrupt and the other isn't, and it's really hard to settle anything there." she says.
And divorce cases occur in all age groups and scenarios.
Jarrett-Dalton says first home buyers pop up more than people might imagine.
"Those first six months of making repayments when you've got to manage your finances on a tighter budget can be very stressful and we can see some couples come undone taking out that first mortgage," she says.
"I've got an example where a couple had been together for some years, saved really hard to get their first home (one party more than the other). Once they got into the house, both parties then had to match their savings and the contribution to the home loan and it wasn't long before that didn't work for them any longer and six months later they were selling.
"It's a shame and a wasted opportunity and here they are coming out of it with no equity and a tougher time to start again."
Traditionally it can be a tougher time for women, and the mortgage broker is often asked what it means if, all of a sudden, their name is on the property title or the mortgage becomes solely in their name.
It can be challenging for women financially because often they've been out of the workforce and their skills might not be up to date, or perhaps they're part-time workers. They usually have the primary caring role or have to sacrifice the caring role to go back to work and put the kids in daycare.
They usually have to manage the childcare fees, and they perhaps have lower income. While there might be some income support such as the family tax benefit or child support payments, not all lenders like to consider these.
"So they might have additional income that would help support a loan, but it isn't considered by every mainstream lender. It can be more challenging to find where they'll fit."
Jarrett-Dalton adds that women in their senior years can also find it challenging. They might not have as much super if they've had employment gaps. And banks now look for property exit strategies in the post-retirement age.
Tips for managing divorce and a mortgage
Rebecca Jarrett-Dalton has these tips for negotiating a mortgage after your relationship breaks down.
- Communicate with your lender, let them know what's going on and maintain repayments as best you can, but if you're struggling, contact its hardship teams as soon as possible.
- Without blocking your spouse from accessing money, perhaps quarantine some funds separately (some for each of you) and turn joint accounts and redraw to "two to sign" to avoid assets being removed.
- Keep civil communication whenever possible, it won't help to inflame matters.
- Avoid the temptation to give away assets or take on disproportionate share of debt "to get it over with".
- Draw up a list of assets and liabilities (right down to furniture, superannuation and credit cards) and try and divide these amicably and fairly - the more you can do together the more you can save longer term.
- Get good legal advice. It doesn't have to be expensive, especially if you've already got a good idea of the asset division. There are benefits in keeping the family home, if possible, in terms of stamp duty savings - which your legal team can assist you with. And if you can't do this, then use the remaining assets wisely to build for your future, as opposed to short-term gains like a car or a holiday.
Getting back on your feet after a divorce
Belinda and Scott* purchased their first home together in 2016 and within months the relationship was feeling the strain of the new finances. What worked well on paper in budget terms wasn't working so well in reality.
In the divorce, Belinda decided to pay Scott out. She received the benefit of no transfer duty and as the property's value hadn't increased a lot she
used a family pledge via her parents to assist her buying out Scott.
Using her DIY skills and new-found free time, Belinda has renovated the kitchen and bathroom. She has also let out her spare room to a boarder to help pay the mortgage. With the improved value of the property and extra repayments, it won't be long before she can stand on her own without the guarantee, but either way she has a growing asset.
*Names have been changed.