It is sadly common knowledge that splitting up with a husband, wife or partner can be an extremely emotional and stressful time. When you also have a joint mortgage with someone, and you’re dealing with separation and divorce, what do you need to bear in mind to help you get through the financial aspects?
Keep paying the mortgage
When going through the separation process, and after either person has moved out, both parties need to remember their individual responsibilities to keep making the mortgage payments.
When a couple takes out a joint mortgage, typically they both agree to be equally liable for the debt – and not just while living in the property.
If either person refuses to pay their “contribution”, and this results in payments arrears, this will damage the credit rating of all parties involved. If one person refuses to pay, this can have severe consequences if your home is repossessed as a result or, if the divorce goes to court for expensive lawyers to challenge which parties are due what percentages of assets.
Your lender needs to know
As soon as it is known and acknowledged that separation is imminent, and before separation occurs, your mortgage lender needs to be made aware. Especially if both borrowing parties, jointly or independently could struggle to meet the mortgage payments.
Lenders are usually sympathetic towards couples going through a separation. They may be willing to consider a payment holiday or an alternative option to help in the short-term – but only if you communicate with them.
This could provide some breathing space to deal with the financial challenges which may arise during initial separation. The original mortgage agreement will still be in place until a long-term solution can be reached.
Mortgage lender informed, what’s next?
Sell up and move on
The cleanest way of moving on after a separation is for both parties to move out of the property, sell the house and pay off the mortgage. Any equity left after the mortgage has been repaid can then be split between the parties after selling costs.
Who gets what from the leftover equity can often cause dispute. Trying to come to an agreement together is normally the quickest and most cost-effective solution, however, if parties cannot reach an agreement, they will need to seek legal advice on their rights. Legal representation will inevitably mean additional costs, so avoiding this route may well prove to be beneficial for both parties where there are no disputes.
Keep the existing mortgage after separation
It may be decided that one party will continue paying the existing mortgage, especially if there are children to consider who also live in the property.
Setting aside the emotional aspects, this may also be useful if the mortgage is subject to early repayment charges due to a discounted or fixed rate of interest applying, meaning there could be additional high mortgage charges to pay to settle the mortgage early and move elsewhere.
If this option is being considered, it is important to assess the affordability of the individual who will continue to pay this mortgage and any other living costs – regardless of who lives at the property. Care will also be needed regarding the potential value of each party’s future share of any equity in the property and professional advice should be considered to help avoid future disputes.
Either party keeps the property
If either person intends to live in the home after separation, transferring sole ownership to the occupier may be an option considered. There are a number of steps involved in this.
Transferring the mortgage into one name will involve one partner buying the other’s share in the property, including their equity.
To do this the occupier will also need to prove to the existing (or another) lender that they can afford the mortgage on their own. The existing lender is under no obligation to remove either party or to transfer the mortgage to one name.
If the lender believes the occupier can afford the mortgage, they may agree to them becoming the sole mortgage holder.
The occupier will need to buy the ex-partner’s share in the property before the mortgage can be put into their name. This may involve getting the value of the property reassessed to confirm the amount of equity in the property, before coming to an agreement on the “buy-out” amount.
Get a new mortgage in one party’s name
Moving a joint mortgage into just one name can provide the same financial break as selling, just with the advantage of retaining ownership. The borrowing party will, however, need to prove that they can afford any additional borrowing.
Is negative equity a factor?
If couples separate while their home is subject to negative equity (i.e. the sales value of the property is less than the amount of the outstanding mortgage/debt secured on the property, selling the home to pay off the mortgage in full may not be possible. Both parties might have to split the outstanding debts and come to agreements with the mortgage provider (or any other lender who has secured debt on the property) to repay this.
Get advice before action
Options really depend on individual circumstances. As hard as the process of separation may be, dealing with the consequences of joint assets and joint liabilities can often add to the stress involved and when there may also be children involved it can be even tougher to gain agreement from all parties as to what the best option may be.
Whatever the circumstances anyone may be going through under this type of scenario, you can be assured of sensitive independent advice from a Linear Financial Solutions adviser.