When couples separate, who pays the home loan?

When couples separate, dividing the assets is always top of mind. But if you share a home AND a home loan, a whole new can of worms opens up.

The home loan still needs to be paid, but who’s responsible for paying it and what if one of you can’t afford their share of the repayments?

Continuing to live in the home and making equal repayments is the simplest option, but often not possible after a breakup. So let’s take a look at other options available to separating couples with a home loan.

Financial considerations

The financial considerations your legal representatives will look at when determining who gets what are similar for both your assets and for your home loan. These can include;

• Whether there’s a prenuptial agreement in place
• The financial contributions made by both parties over time
• Non-financial contributions to the relationship (i.e. raising children)
• The number of dependent children
• The earnings of each party
• The future earning potential of each party
• The length of the relationship.

Deciding who takes the property (and the debt!)

So assuming you both can’t continue to live together and pay off the home loan, let’s look at three other possible actions you can take when dealing with a shared home loan.

Buy your ex-partner’s share

If you’re financially stable yourself, you might consider buying your ex-partner out of the home loan.

You would need to qualify for the home loan on your own and meet certain criteria, such as having a good repayment history and enough equity in the home to pay out your ex-partner (or proof you have the funds to do so).

If you’re eligible, you could then refinance and extend your home loan to reduce the repayments, find a better interest rate and fund your settlement pay-out.

On the downside, if you increase your home loan to pay out the settlement, you may have to pay Lenders home loan Insurance (LMI) if you borrow more than 80% of the property’s value. And you’ll have to pay Capital Gains Tax if you decide not to continue living there and sell your home instead.

Sell your share to your ex-partner

Another option is to sell your share of the property to your ex-partner. The onus would then be on them to qualify for refinance to buy out your share and they would be subject to the same pros and cons as you would if buying them out.

From your side of the fence, you would be eligible for Capital Gains Tax rollover relief and wouldn’t have to pay CGT on the share you sell to your ex-partner.

Sell the home and share the profits

The third strategy is to sell the home and share the profits between you. This is an attractive option because it allows both parties to start afresh with the proceeds from the sale and move on with their lives.

The downside of this is if you and your ex aren’t on good terms, it can be hard to pull off. You’ll need to collaborate on things such as real estate agents and a price and may have to prepare the property for sale together. The result could be a rushed sale for less than the property’s worth.

Paying the home loan in the meantime

Whichever option you decide on, the fact remains that the home loan still has to be paid. If it isn’t, the lender may foreclose on your home and sell it to recover their losses.

And if you or your ex-partner have moved out and aren’t on speaking terms, it’s quite easy to let home loan payments slide while finances are stretched and emotions are running high.

But if you’re able to, it’s in your best interests to keep up those payments. This is because post-separation financial contributions may be taken into account during division of assets and it demonstrates that you have tried to be reasonable and cooperative during the separation.

It's also because most lenders require a 6-month history of perfect repayments before they’ll refinance a loan, although some will consider 3 months, as long as there are no other credit issues.

Refinance options

Whether it’s you or your ex-partner, if you decide to refinance your home and continue living there, there are several refinance options available to you.

• Rate-and-term – changing the term of your loan and/or securing a better interest rate.
• Cash-out – borrowing a little extra on your existing loan amount by liquidating some of your home equity.
• Cash-in - lowering your overall loan amount by contributing a lump sum amount.
• Consolidation – combining your debts and turning them into one debt and one repayment.

Whichever refinance option you choose, the trick is to make sure it puts you in a better position than you were in with your previous loan.

Want to know more? Let's talk and explore your refinance options.