‘Who should pay the mortgage when we separate?’
Issues regarding who should pay the mortgage payments on the family home or other properties which form part of the property pool, frequently arise between separating couples. The issue often needs to be resolved if there has been an increase in housing expenses, for example if one party moves out of the matrimonial home and rents an alternate property.
When the mortgage payments become an issue
Sometimes, the person who leaves the home believes that they shouldn’t be required to contribute to the home loan payments anymore because they are now paying for their own separate housing expenses. This is not necessarily a correct assumption.
It can certainly be challenging trying to meet the costs of separate households and pay for all of the additional expenses that come with it, especially if there are children involved. The need to negotiate the payment of the mortgage is often one of the most urgent financial issues that arises on separation. This negotiation can be difficult because of the circumstances of the relationship breakdown and even more fraught if there are issues of lack of trust in financial matters between the parties.
Who pays the mortgage? How it is figured out
Many separating couples are able to successfully negotiate the contribution each should make to housing expenses between the two homes on an interim basis. If both parties are co-borrowers, they each have personal obligations to the bank to meet the monthly loan repayments. Default can affect the credit rating of the borrowers and / or lead to a forced sale. If they are unable to reach an agreement, family lawyers can assist them.
As family lawyers assisting clients through this process, we carefully examine all sources of income of each party and their reasonable living expenses including rent on the substitute premises, and day-to-day expenses including their child support obligations, other liabilities such as motor vehicle expenses, and special expenses such as private school fees.
Sometimes the party who remains in the home may have insufficient income to make any contribution to the mortgage payments, for example if they are not working and caring for children. In these cases, they will be reliant on the other party to not only meet the expenses of the new rental property, but also the mortgage on the family home.
However, mortgage payment disputes do sometimes lead to litigation. The Court will require full disclosure of the income and expenses of each party and their overall financial position including care of children in determining the dispute. In doing so the Court will undertake some scrutiny of the reasonableness of the expenses asserted by each party. For example if the party who has left the home enters into a lease for a luxury apartment and the family is left in financial strain as a result, the Court will not treat the rental of the apartment as a reasonable expense and will only allow a more modest rent amount as one of the necessary expenses of that party.
To avoid litigation, it is very important that people negotiate calmly and preferably maintain the usual mortgage payment arrangements, including the usual direct debit payments and redraw facilities. It is not advisable to access funds available on redraw facilities unilaterally, as this will often lead to urgent court action for orders for restitution of the funds to the redraw account. Further it is inadvisable to make rash decisions about expensive alternate accommodation.
Many parties leave the existing arrangements for mortgage payments in place while they are negotiating their property settlement. If one party pays a disproportionate amount of the mortgage after separation, this can usually be adjusted between the parties in the property settlement or spouse maintenance negotiations.
Many couples who have separated since the start of the COVID-19 have deferred their mortgage payments for 3 to 6 months. While this brings about a short term reprieve, it is essential they have agreements in place with each other, or appropriate Court orders if required, as to who will be responsible for the payments when they resume. Many will face higher mortgage payments at the end of the deferral period and an increased loan amount.
Our goal as family lawyers is to have people come to a settlement so that they can meet their own household expenses from their income and resources, including any mortgage payments they decide to take on after settlement.
Additional properties or business secured over the family home
It is common for business loans to be secured over the family home by way of collateral mortgage, even if only one of the home owners is involved in the business. It is crucial to obtain a full understanding of the capacity of the business to maintain the loan payments secured over the home as soon as possible after separation to minimise the risk of default on the loans. Family lawyers can assist in ensuring all loans are met pending a property settlement being reached.
What happens to the mortgage on settlement
If a person wishes to retain the matrimonial home as part of a property settlement, that person will be required to refinance the loan into their own name at the time the home is transferred to him or from joint names. Once that occurs, the finances of the separated couple are no longer intertwined.
If neither party wishes to retain the home or cannot afford to maintain the loan repayments after settlement the home will be sold. Again agreement will need to be reached in relation to the contributions to the mortgage payments until the completion of the sale.
The negotiations become much more complex when the loans are secured by mortgages over partially constructed homes, vacant land, and vacant investment rental or commercial properties. These issues are becoming increasingly common due to the economic impacts of COVID-19 and usually require skilled advice from family lawyers and accountants.
DDCS Lawyers specialise in all aspects of family law and can help guide you through the difficult process of separation. If you need assistance, contact our team on (02) 6212 7600 to book a consultation.