Divorce and Financial Planning
We are going to look at how getting divorced affects your mortgage, the advice you might need, and the options available should this happen to you.
What happens to a joint mortgage when you get divorced?
If you have a joint mortgage, then you’re both equally responsible for the repayment of that mortgage. Leaving the marital home doesn’t remove that responsibility in any way and you just need to consider what’s going to happen with the property.
There are normally two options:
- The property is either sold and the mortgage is either redeemed or the mortgage continues or an element of the mortgage continues on another property.
- You keep the property. One person buys the other person out and the mortgage can continue in some shape or form on the current mortgage.
There is lots to think about. There are lots of options. Most importantly, you must ensure that you maintain those mortgage repayments because that can have a serious adverse effect on your future ability to obtain credit later down the line.
What if my name is on the mortgage but not the deed if I’m getting divorced?
You are responsible for the mortgage, but you’re not on the property ownership deed. You don’t own the property, you have no legal rights over that property. However, that’s very rare.
That might be the case for two reasons:
- It’s unlikely that somebody would want to be responsible for a mortgage on a property, which can be a considerable debt, a considerable commitment, but not benefit from being an owner of that property.
If this panics you, you don’t need to worry. If you were in that situation whereby you were jointly responsible for a mortgage but not entitled or not on the property deeds, you would be aware.
You would have most likely had quite specific legal advice at the point of buying the property and arranging the mortgage. It’s very unusual, but whether you own the property or not, you would be responsible for that mortgage.
- If the property again, was sold as a result of the divorce, then nine times out of ten upon sale, the mortgage is redeemed and you, therefore, have no further liability to that mortgage. You can both go your separate ways and move on emotionally and financially. Whether you are entitled to or named on the property deed, if you are named on the mortgage, then you’re still responsible for that mortgage until it is fully redeemed or repaid to the lender
I’m getting divorced. Can I stop paying the mortgage?
No. If you’re struggling financially, the very first step you must take is to contact your lender. Make them aware and put them in the picture. If you’re going to stop paying your mortgage because you may have moved out of the property and you don’t feel that it’s your responsibility anymore, that’s a really bad idea.
Whether you live at the property or not, if you’re a party to that mortgage, then you are equally responsible for the repayment of the monthly mortgage payment or the balance in its entirety. Even though you move out, you’re still responsible.
If you did stop paying the mortgage, what effectively would happen is, you’d fall into mortgage arrears. That’s going to have a serious adverse effect on your credit rating and will hinder your options or choices, or even prevent you from obtaining a mortgage again in the future.
Think very, very carefully before you stop making your mortgage payment. Take some advice before you do that. If you’re struggling financially, most lenders will support you. They’ll do everything they can to establish a payment plan to ensure that it is affordable and that you don’t fall into mortgage arrears.
Can my ex-partner take over the mortgage?
Quite simply, all that happens is the mortgage ceases to become a joint liability. It ceases to become a joint mortgage and they take over the mortgage in their name. There are a few things to consider here. There’s quite likely to be some equity in the property, the difference between the value of the property, and the debt remaining. You would need to decide how that equity is going to be split just to keep things nice and straightforward.
If you were both, for example, equal to 50 percent of the equity in the property, then your partner may want to take the mortgage on. It may well be that he or she needs to raise 50 percent of that equity to buy you out of the property, so that you’re walking away with your fair share of the equity.
What happens is, they apply for a mortgage on the property in their name and they increase the amount of borrowing to cover the amount that they need to pay you. This means you walk away with your fair share and they continue with the mortgage in their sole name, albeit with an increased mortgage amount. Unless, of course, they’ve got money saved independently to pay you, but that’s very unlikely in the event of a divorce.
To clarify further. Can I buy my partner out of the mortgage?
It works either way, but the only thing is you’ve got to bear in mind that it is a brand new mortgage application.
Lenders are going to assess you as a single mortgage applicant. They’re going to want bank statements, payslips, or self-employed accounts because a lender has to demonstrate that you’re going to be in a position to maintain those mortgage payments on your own on a single income. It’s the same process as you went through when applying for the mortgage originally.
How do I remove my name from the mortgage if I’m getting divorced?
There’s a couple of points to bear in mind here. It’s quite common that a couple will divorce partway through a mortgage that they’re tied into.
When you look to take the mortgage over from one person or if you’re looking to both move on and buy your properties, then there’s consideration around the actual product that you’ve got and whether you want to port that to a new property.
If you’re selling the property, for example, you may both want to port 50 percent of the remaining mortgage balance, taking advantage of the rate that you’ve got, which is a really low rate.
You can then borrow on a second mortgage that runs alongside your existing mortgage, which would need to be with the same lender but means you would do two things:
- You take across the products that you’ve already got, which typically is a more favourable product. That would be the reason for doing it, but it also means you avoid any early repayment charges.
If that mortgage is redeemed in any way, there would be an early repayment charge to be paid if you were tied in, let’s say, a two, three or a five-year product with that lender.
- The other point to consider is, if one person wants to buy the other person out, then the other person needs to permit that to happen. It’s worth bearing that in mind, because the other person may say, “I’m entitled to half of that outstanding balance associated with that mortgage product. I want to take that to my next property.”
What if the house is in negative equity and I’m getting divorced?
This question indicates that there’s still a lot of people out there that are potentially in negative equity. For people not too familiar with the term, it essentially means that debt is higher than the value of the property. If the property was to be sold, there would still be an outstanding debt that needed to be repaid. Debt doesn’t get written off just because you’re divorcing or separating and the property is being sold.
If you are in that situation, the very first thing to do is contact your lender to make them aware of the situation and that you are going through a divorce. They will work with you to ensure that there are options to repay the balance that is needed.
Ultimately speaking, you are liable for the debt, the outstanding mortgage balance. If the property is sold, proceeds from the sale of the property would pay as much of the outstanding mortgage balance off as possible, but then the lender would enter into an arrangement with you both to repay the amount that is still outstanding.
It’s really important to understand this. Sometimes people think because they’re getting divorced, they can automatically be taken off of that mortgage liability. “We’re getting a divorce. We’re going our separate ways.”
The only way that would happen is if the property is sold. If, for example, the property is not being sold and one person wants to buy the other person out, the lender still needs to demonstrate this is affordable for the person taking on the mortgage.
In a worst-case scenario, if it is not affordable, the lender would potentially refuse any changes to be made to that mortgage contract. Sometimes the only option to go your separate ways is for the property to be sold.
Essentially, sometimes it’s not an option for one person to buy the other person out because if it’s not affordable, the lender won’t allow it. They’re not going to put themselves in a situation whereby the mortgage is currently affordable based on two incomes, but it wouldn’t be affordable based on one income. They’re not going to allow what we call a transfer of equity to happen. That’s worth bearing in mind.
There’s an application process and lenders are very strict around whether that person can take the mortgage on in their sole name.
Can I get a new mortgage if I’m getting divorced?
There’s no difference whether you’re getting divorced or not. A lender will assess you for a new mortgage in the same way that they assessed you when you took your original mortgage out on the marital home or any other property that you’ve bought previously. Getting a divorce does not adversely affect your ability to obtain a mortgage.
Lenders will carry out the same affordability assessments, same credit checks and consider everything when you apply for a new mortgage on a new property post-divorce.
You don’t have to wait either, this can be done simultaneously. If the property is being sold, you can sell your current property and at the same time find a new property, providing the sale and the purchase is simultaneous. You don’t have to wait for the property to be sold, divorce finalised, and money in the bank. It can all be tied in quite seamlessly.
Does getting a divorce affect my credit rating?
No. Getting a divorce doesn’t adversely affect your credit rating in any way. Essentially, you just ensure that you’re maintaining the mortgage payment and all of your other financial commitments, during what is going to be a very testing, very stressful, and emotional time. Getting a divorce doesn’t put you in a weaker position, from a credit rating point of view.
Will the lender take into account any child maintenance or spousal maintenance that I may receive?
Definitely. One of the biggest issues that people come across when they’re divorcing is being able to demonstrate affordability for the mortgage that they need.
You still need a family home, especially if there are children involved and it can be harder to demonstrate affordability to obtain the mortgage needed to buy a bigger property to accommodate the family needs.
Lenders will have a look at other sources of income that you receive, especially if you’re going to receive child maintenance or spousal maintenance.
Some lenders will want that to be confirmed via a court order. Some lenders are happy that it’s through the child support agency. Some will also take it into account, providing there’s a track record. Quite often what happens with a divorce case is, a couple may have been separated for a significant period leading up to that divorce.
Maintenance payments may already be made or being received. Some lenders will say, “We’ve got a track record and we can see that these maintenance payments have been received.
“Even if it’s not as a result of a court order or CSA involvement, then we’ll still take those into account”. That essentially runs alongside your earned income and then boosts the amount of money that you can borrow on a mortgage.
We need to make sure we can evidence that maintenance income is regular and in the eyes of a lender, it can be relied upon.
There are lots of different options when it comes to divorce mortgage and financial planning. It’s just having somebody to guide you through those options and to tell you what can be done and what can’t be done.