You purchased a home with your partner some time ago. Whilst everything was working out initially, it soon became clear that it wasn’t going to last.
You’ve now separated but not sure how you’re supposed to deal with the property you own together and not sure what happens to the joint loan you have.
Here are a few things we suggest you keep in mind as you navigate a property separation.
Enlist the help of a family law specialist
Whilst things might seem to be going amicably now, unfortunately things can turn messy pretty quickly.
Even if you and your ex-partner agree on the terms of the separation (i.e. who gets the house, how much does the other person get as a ‘buy out’), it’s advisable to get legal support to draft the Consent Orders or Financial Binding Agreement.
Should you wish to purchase a property of your own later on, depending on the state you purchase in, having a formalised separation agreement in place could help you to qualify for home buyer stamp duty concessions. It also means there can’t be any ambiguity when it actually comes time to separate the assets.
Ensure repayments on your joint loan/s continue to be paid on time
Depending on the arrangements of your separation, you may have already moved out of your jointly owned property and now paying rent elsewhere. Despite this, if you’re a co-borrower on the original loan, you are still jointly and severally liable for meeting the loan repayments.
So regardless of the agreement you’ve come to with your ex-partner (for example maybe they agreed to make the loan repayments and continue living in the property), you need to personally ensure the repayments continue to be made on time.
A late or missed mortgage repayment for a loan you’re a co-borrower for, will significantly impact your ability to secure finance for another purchase down the track. You need to ensure your personal credit file/rating remains unblemished if you’re ever wanting to apply for finance again in the future.
Another point to consider – if you have joint savings/offset accounts, we recommend you review the access arrangements on these sooner rather than later. You may want to agree jointly to change the account access – so both of you need to approve any changes/updates. It’s also not a bad idea to set up an account in your name only.
Understand your borrowing capacity as a single person
The perfect time to investigate your borrowing capacity as a single person, can be a bit tricky to get right.
You need to have an idea of the separation terms.
But before you can even loosely to these terms, you need to understand how you’re placed with your own borrowing capacity.
For us to determine your borrowing capacity, you’ll need to have at least a rough idea of the following:
- Are you likely to receive a cash payment?
- Are you taking full ownership of the property (and the related loan)?
- What is the property’s agreed value?
- What’s happening to other jointly owned assets?
When you know what the separation terms are likely to be, it’s critical to confirm your borrowing capacity before you formally agree to anything.
And under no circumstances should you be signing Consent Orders or a Financial Binding Agreement, before you’re confident you can meet your side of the terms.
For example, if you’re buying out your ex-partner, we need to ensure that you can take on the full responsibility for the existing loan (after taking into account any buy out payments etc).
Whilst you may have been making the repayments yourself the last 6 months anyway, it’s not just a matter of taking your ex-partner off the loan. You will need to qualify for – and re-apply for – a new loan solely in your own name. This new loan will end up paying out the existing loan you have with your ex-partner. At the same time the old loan is paid out, the title of the property can be transferred to you solely.
This means we need to conduct a full financial analysis of your situation to confirm you have capacity to take on the loan by yourself (in accordance with current interest rates, servicing metrics and lending criteria).
What if you can’t afford to take over the loan yourself and own the property in your own name?
There are a few options here. It really depends on how far your borrowing capacity is stretched, how much cash you have available to assist and your personal/ family preferences.
First option – reduce the loan amount required
if you have cash reserves or access to financial support from family, servicing for the new loan can often be demonstrated by reducing the amount of the new loan required.
For example, the existing balance on your joint loan might be $500K, but your sole borrowing capacity only stretches to a new loan of $480K.
If you had $20K of your own cash and can contribute these funds on the date of the property settlement, a new loan of $480K could be established with you being the sole owner of your property.
Second option – involve other parties
The second option is a little more complex and involves a little more time to everything in place .
This involves having another party (typically a parent) ‘buy’ out your ex-partners share of the property. This means your parents would become joint owner/s of the property too, as well as co-borrower/s on the new loan. Your parents would be now jointly and severally liable for the new loan and also own a share of the property.
This second option isn’t always available (or suitable) and will of course depend on the financial situation of your parents, whether this is something they want to do, whether this interferes with other plans they may have for their future, and a whole host of other factors.
Third option – sell the property
If the numbers just don’t stack up, you may need to consider selling the property.
Property separations can take some time to work through, but we’re here to help.
We’re very experienced at helping clients through this process and understand the sensitivity (and confidentially) of these matters. Just like any personal information you share with us as your mortgage broker, your information remains private and confidential and will not be disclosed to any other party (other than a lender, should you decide to proceed to an application in due course).
If you need help with your own property separation, please reach out to our team here.
