What are the costs of buying someone out of a joint mortgage?
If you own a property jointly but things fall apart, you can buy out their side of the mortgage.
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Joining forces with a friend or family member to buy a property together can be a great way to break into the property market, but things can get difficult when it’s no longer suitable for both of you to own a share in the property. If you want to buy someone out of a joint mortgage you need to know your ownership structure and who owns what (is it 50/50 or a different split?). You also need to work out who has paid for what in terms of mortgage repayments, stamp duty and property maintenance.
How much does it cost to buy someone out of a joint mortgage?
There’s a wide range of factors to consider when buying someone’s share of a property. You and your co-owner will need to agree on a fair price for that person’s share, considering factors such as:
- How much you both contributed to the deposit
- How much stamp duty each party paid for the purchase
- How much each person has contributed in mortgage repayments
- How much each person has paid for ongoing maintenance of the property
It’s worth pointing out that not all ownership structures are as simple as a 50:50 split. For example, one party buying the property may have a large deposit saved but earn a low income, while the other may not have any deposit to call on but has an excellent income-earning capacity, resulting in an ownership split such as 60:40 or 70:30. If both parties obtain independent legal advice, you will be able to work out how one person can be bought out in a deal that’s fair to both parties.
Before buying someone out of a joint mortgage, you’ll also need to calculate how much the property is currently worth. A property purchased for $500,000 a couple of years ago may now be valued at $650,000, so the property share purchase will need to be based on the home’s current value. You and your co-owner will need to work out the property’s value – examining recent sale prices, independent valuation etc – but obtaining independent legal advice is once again the best way to ensure that neither party is short-changed.
Other fees and charges
It’s important to remember that changing property ownership will often incur stamp duty, which is usually a charge of around 3.5–5% of the property’s value. However, stamp duty can be waived in certain circumstances, for example if you’re getting divorced and you and your partner have a formal separation agreement.
You will also need to remember to factor costs such as home loan refinancing fees and legal expenses into your calculations, and remember that the person selling their share may also have to pay capital gains tax (CGT) if the home is an investment property.
Last but not least, make sure you’ll be able to handle the ongoing financial commitment of paying off a mortgage by yourself before you go through with the deal.
Can I buy my partner out of a joint mortgage in a divorce?
There’s a common misconception that if you’re getting divorced and you’re taking ownership of the family home, you can simply take over your ex’s share of the mortgage. This is not possible in Australia; you will instead have to refinance to a new home loan that is in your name only.
Your solicitor will help you draw up a formal separation agreement to outline the rights and responsibilities of you and your ex and how your assets will be split. Having a separation agreement in place will also help you avoid paying thousands of dollars in stamp duty.
You can find out more information about dividing property after divorce in our handy guide.
Before you buy
The process of buying someone’s share of a property can be made a whole lot easier if you plan for the future before you even buy the property. Each party who will own a share of the house should seek independent legal advice to determine their rights and responsibilities and the right ownership structure for the arrangement.
There are two options to choose from: joint tenants and tenants in common. Joint tenants own a property collectively but individually don’t own anything, and if one party passes away their property share can be automatically transferred to the other owner.
If you’re a tenant in common, you own a portion of the property – a share – which can be determined before you buy the house. If you pass away, that share is passed on to a beneficiary you nominate rather than to another owner.
Tenants in common is the more popular ownership option but it’s essential that you get a co-ownership agreement drawn up before you buy a property. This agreement will outline the financial contribution and ownership share of each party, specify who will be looking after maintenance costs and, importantly, also detail the exit strategy if someone wants to sell their share of the property or buy the other(s) out.
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Ask an Expert
Hi, my de facto partner has taken over the house we owned and I have received a payout. The separation agreement we have isn’t legally binding as it wasnt witnessed or reviewed by two separate solicitors. Does my ex partner need to pay the transfer duty?
Hello,
We can’t really help you here as this is a personal legal situation. I suggest getting a solicitor for legal guidance.
Kind regards,
Richard”
I have a home loan with my brother but he wants out and my son will come on the loan to refinance. How do we work out how much my brother is owed and how much stamp duty would we have to pay?
Hi Elise,
There are a lot of factors to consider when transferring someone’s share of a property, many of which are outlined in the article above.
First, you’ll need to calculate how much the property is currently worth. The stamp duty will be based on its current value, with consideration of the percentage of the property being sold. If it’s an equal half-share, then it will apply to 50% of the property’s value.
To determine the buy-out amount, you need to calculate how much you paid for the property versus how much it’s worth today. It would be best to seek legal advice from a solicitor for help, to make sure you come to an agreement everyone is happy with. It’s an investment of a few thousand dollars, but it could save many headaches throughout the process.
I hope this helps!
Regards,
Sarah
Hi,
I bought a property with my mother and then used the equity to buy another one, I live in the first ans she lives in the second, we are going to sell her house and I wish to buy her out. Will I pay 50% stamp duty on the property?
Hello Amy,
The amount of stamp duty depends on how ownership of the property is shared. If it’s a 50/50 arrangement, then you would have to pay 50% stamp duty. Some states and territories have exemptions for spouses but usually not for other relationships.
You can also consult an accountant or conveyancer for more information about your particular circumstance too.
Cheers,
Richard
Hi there,
I own a 50/50 share in an investment property as tenants in common. We have decided to sell our share to the other owner. Please advise what costs we are liable for ie. Capital Gains Tax, Stamp Duty etc
Hi Ben,
For the stamp duty, it’s the buyer who will pay this based on the current value of the property. As you’ll be selling 50% of the property, stamp duty will be based on 50% of the property’s current value, at the investment stamp duty rate in your relevant state or territory.
CGT will be calculated based on how much your investment grew in value. For instance, if you bought the property for $500,000 (your share worth $250k) and it’s now worth $750,000 (your share worth $375,000), you’ve made a capital gain of $125,000. This amount (less any deductible expenses) will be added to your taxable income in the financial year that you sell the property, and you’ll pay tax based on your personal tax rate.
If you’ve owned the investment for longer than 12 months, you should be entitled to the 50% CGT discount. In the above example, this would reduce the capital gain down to $62,500.
I hope this helps!
Cheers,
Sarah
Hi there
I am going through a separation and want to sell my share of a 50% jointly owned investment property. My ex has agreed to buy me out, how do I calculate what my share is worth (based on the current mortgage, and what the house is valued at now)?
We are on talking terms so what would be the nest steps that I should take?
Hi there,
Sorry to hear about your separation. To move forward, ideally, you would get a formal valuation first – these cost about $200-400, and are available from valuers like Herron Todd White. Because it’s an investment property, this fee should be tax deductible.
Once you have a formal valuation, you can use this to determine how much your ex-partner owes you. Assuming you both contributed equally to the deposit and the mortgage/onwership repayments, and it’s genuinely a 50% jointly owned investment property, then you would subtract the mortgage from the valuation, and he would pay you the difference.
This would likely be funded with a loan. For instance, if the property is valued at $500,000 and your mortgage is $400,000, then he owes you 50% of the difference (50% of 100,000, so $50,000.) He would refinance the property into his name and get a new loan in his name, and pay you the $50,000 with the proceeds.
He should be able to avoid paying stamp duty in these circumstances, too. Because you’re disposing of an income producing asset, there may be some tax implications for you like CGT, and the ability to claim stamp duty. You should consider engaging an accountant with experience in property investments to help you with this, as it can get a bit complicated.
Hope this helps and all the best with finalising your property situation.
cheers,
Sarah