Everything you need to know about home loans after divorce
If you have recently become divorced or separated from your spouse then it may be time to consider refinancing. Lenders might class this as two separate transactions; a refinance and a purchase.
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According the Australian Bureau of statistics, in Australia, there are around 50,000 divorces each year. There are many nuances when it comes to handling financial decisions after a divorce or separation.
Many want to know what to do with the family home or investment properties when separation or divorce occurs. There are a few options, which include:
- Buying out the property share owned by your ex-spouse
- Selling your property share to your ex-spouse
- Selling the home and sharing the profits
Do I have to refinance after a divorce?
Whether or not you'll need to refinance depends on what you decide to do with your property after your divorce. If you decide to buy out your ex-spouse's share of the house you will likely need a home loan to do so. Most lenders will treat this application as a refinance. While other countries may allow you to take possession of the home loan, in Australia, the bank does not allow you to take over someone else's loan. You cannot simply remove an individual from the loan agreement. The only option is to refinance your loan and get a different loan in either your name or the name of the individual retaining the property's ownership.
What if I choose to sell my share to my ex-spouse?
If you choose to sell your share to your ex-spouse, they will have to refinance the home loan to buy out your share of the property and to remove your name from the home loan. You'll also want to make sure to have your name taken off the property title after the divorce.
What are the tax implications of selling to my ex-spouse?
Should you sell your share of the property to your ex-spouse, you will be eligible for capital gains tax (CGT) rollover relief. This means that you won't have to pay CGT on the share you sell to your ex-spouse, because the spouse who receives the property is assumed to receive the capital gain or loss on the property should they decide to sell in the future.
Listen: We want prenup! A podcast on the cost of divorce
Buying out your ex-spouse
There are many couples who divorce or separate under less than ideal conditions, which means that even when you agree to dividing up your assets, you could still meet with difficulties. Here are some of the drawbacks:
- Issues may arise when you want to come to an agreement about the cash settlement after the property has been sold.
- Bad credit may exist on your credit file due to unpaid bills related to the divorce
- Both of you may refrain paying the mortgage based on legal advice
- You may not have anticipated the separation and may not be prepared to put in another home loan application
What about stamp duty?
In a lot of cases, you won't have to pay stamp duty when buying out the property share of your ex-spouse, whether it is a single family home or investment property. Stamp duty is not normally payable on a transfer of equity. Stamp duty is a complex legal issue, so you must speak with a solicitor for confirmation of applicable stamp duty, depending on your situation.
Case Study: Todd and Jenny
Todd and Jenny had been married for almost 10 years when their marriage started to fall apart. They had a $340,000 home loan on a property valued at $425,000 and had been diligently paying it over the years and had the balance at $280,000. They had avoided LMI by saving a substantial deposit to have an LVR of 80%.
After the divorce there were questions around the property and who should take what and how much share each would get. After consulting with a solicitor it was decided that Todd would buy out Jenny's half of the property. Here's the buy out scheme they worked out. The solicitor has assumed a 6% capital growth of the property each year.
Property value including capital growth increase
Details on Todd and Jenny's Home Loan
- Average interest rate (ABA stats): 0.0726
- Loan term: 30 years
- Repayment frequency: monthly
- Repayment type: P&I
- Monthly repayments: $2,321.71
- Principal left after 10 years: $296,729.10
- Equity build up: $43,270.90
To work out how much Todd owes Jenny the solicitor divides the total property value at the end of their marriage by the original property value. To buy out Jenny, Todd will need to pay $380,555.14
What about capital gains tax?
Should you take ownership of the property after a divorce and subsequently decide to sell, whether or not you're liable for capital gains tax (CGT) will depend on how the property was used before and after the divorce.
If you continue to live in the property after the divorce, you won't be liable for capital gains tax when you sell. You'll be exempt under the main residence exemption.
If you choose to move out of the property and rent it out, you may continue to be exempt from CGT under the temporary absence rule. So long as the property is still listed as your main place of residence, you can be absent up to six years.
Should you move into a new main place of residence and rent out the property after the divorce, CGT will be calculated under the assumption that you acquired the property at its current market value at the time it became income-producing. That market value will be the base by which CGT is calculated when you sell.
Mortgages to pay out your ex-spouse
You could overcome these obstacles or difficulties by applying for a home loan to pay out a settlement for divorce, an agreement for separation or settling a property. However, a bank will assess any of these as either an acquisition or a refinance. Because of this, you will find that the lending institution will evaluate the loan application differently by applying a variety of lending conditions, which could include:
- Proof of funds needed to pay out your ex-spouse, if there is not enough equity in the home. This is similar to a home loan purchase.
- The bank may not ask for proof of savings as they would a purchase.
- An excellent history of repayment on your existing home loan is necessary. This is similar to a refinance loan.
See below for some options when refinancing your home loan. You may also want to contact a broker to discuss your situation further.
Comparison of Home Loans
What if you have neglected loan repayments?
It is not uncommon for individuals who are experiencing a divorce or separation to miss some of their mortgage repayments. In many cases, disputes will arise over which partner should pay, and because of the emotional chaos many individuals will not remember to make regular payments. If you plan to buy out your ex-spouse it is good practice to continue paying your share of the mortgage. Skimping on payments doesn't reflect well on your credit file and may make it harder to apply for a home loan to finish up the settlement. Most mortgage lenders will not refinance a home loan unless the borrower has flawless repayments for six consecutive months.
Is it possible to be in arrears with a loan and still get approved?
There are some lenders that will agree to three month repayment history if there are no other credit issues. These lenders will take a look at your overall situation, regardless of the number of payments missed. You will, however, have to provide proof that you can make the new repayments.
The bank valuation is crucial to your refinanced loan
If the lender does a valuation on the property and the figure comes in at a low cost, the loan could be declined. This may cause you to halt the divorce settlement, which would prevent you from dividing the property successfully. Unfortunately, there is no way you can control the valuation provided by the lender. Before you submit your application, you can seek the assistance of an experienced mortgage broker who will be able to get different valuations from various lenders. You would then put in an application to the lender that has the most satisfactory valuation. It should be noted, though, that the drawback of putting in so many applications is that too many credit enquiries can damage your credit score and make it more difficult to qualify for a loan.
How much am I able to borrow?
If your history of repayment has been excellent and you meet all the bank guidelines, then may be possible to get a loan for 95% of the value of your property. You will have to pay lenders mortgage insurance (LMI) if you borrow more than 80% of the value of your property. If you want to borrow in excess of 95% of the value of your property, a security guarantee is needed. Calculate how much you can borrow with our calculator.
Can I use child support payment as income to get a home loan?
Yes, some lenders will accept your child support benefit as income when applying for a mortgage however this will vary depending on the lender. The following may apply:
- Age of dependents. Most lenders will take into account the age and number of dependents that you have. The older your children, the less likely the lender will accept your Family Tax Benefit (FTB) income, particularly children aged 11 years and over.
- Centrelink statements. The lender will request at least 6 months of Centrelink statements. You can download a statement from the Department of Human Services website.
Family Tax Benefits (FTB) Part A and B and child support income are accepted by a number of lenders. However, keep in mind that some lenders view child support payments as an unreliable source of income so they may not take this into consideration when reviewing your borrowing capacity.
When speaking to your mortgage broker or lender about your situation, you'll need to specify whether the child support payments are via the Child Support Agency (CSA) and whether the payments are court ordered.
You may also be required to supply the following paperwork:
- A copy of the Family Court Order
- Statements showing the benefit being deposited into your account
- A letter from your solicitor confirming the status of the benefit
Recently divorced? It may also be time to consider reviewing your life insurance policy
If you have recently separated with your partner, it could be worth also reviewing your current life insurance cover to ensure you still have adequate cover in place. You may currently have a joint policy in place with your spouse that you would like to review or you may want to adjust the beneficiaries on your policy. Just as getting married is a key time to consider taking out life cover, divorce is an important time to review the cover you have in place to ensure it still meets your needs. Review your life insurance and receive a free quote for cover
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