What Happens to Your Mortgage in a Divorce? In this guide we cover:
The latest numbers from Statistics New Zealand tell us that, these days, roughly one in every 130 marriages or civil unions are ending up in divorce.
For most, it’s a deeply painful time. And as if the emotional toll of the situation wasn’t enough, then add to that the job of extricating your lives from one another – working out what’s best for the kids, what happens with the house, the family business, the pets. It can be brutal.
When you’re going through that process, one of the biggest sticking points is likely going to be over matters of money.
If you and your partner own a home and have a mortgage together, there will be a lot of questions about how to navigate that, and where to next.
What happens to a home and mortgage during divorce?
When a couple first separates, nothing really changes from a legal perspective. If you’ve both signed the mortgage, you both technically still own the property, and are both still equally liable for the mortgage. If one of you wants to stay in the family home, this can be tricky to navigate, and couples will have to decide whether that person will pay rent.
Then, later, when it gets to the legal separation and division of assets, the property will need to be sold. If neither person wants the house, or the one who wants it can’t afford it, it’ll be sold on the open market. In this instance, everything’s pretty straightforward. The net proceeds from the sale are split, and both parties go on their way.
If you opt to sell, you might then be looking at buying a much smaller house in the same area or going somewhere more affordable to buy a similar-sized property. When there are kids involved, that can be a huge upheaval.
That’s why, in most cases, one person will want to stay in the family home, which means having to buy out their former partner in a private sale. This is where things can get a little complicated.
Buying out the other party – what’s involved?
It’d be awesome if it were as simple as just getting the other party taken off the existing mortgage, and off you go, but there’s a bit more to it than that. You’ll need to apply for a new mortgage and do a full credit assessment, so the bank can work out your borrowing power as an individual.
One of the first things they’ll look at is your deposit …
This is all about the equity you have in your home – or in other words, the difference between what you owe on your current mortgage and what the property is worth. Depending on the market, you could end up with lots of equity to play with, or less equity if you’re look to sell down the line.
Throw into the mix all the costs that come with selling a property in a less competitive market (real estate and marketing fees, a potentially lower sale price), not to mention the legal costs of the divorce itself, and that’ll take a fair chunk of equity, too.
The affordability of ongoing costs and expenses
Next, the bank will have to do a deep dive into your financial situation – your income, expenses and credit history, any skeletons in the closet – to work out whether you’re going to be able to keep up with mortgage repayments.
Changes to the CCCFA, introduced in December 2021 to better protect vulnerable borrowers, mean the laws around issuing home loans have become a lot more prescriptive. It’s now much harder for banks and other lenders to show flexibility when assessing your ability to afford a mortgage, and the criteria for approval is a lot tighter.
What about income inequality?
When one partner earns more than the other, which is really common, that’s a whole new layer of complexity. In these instances, the goal should be to settle on a way forward that gives both parties the best chance of getting back on the property ladder.
Usually (but not always), that looks like the partner with the lower income getting more equity out of the transaction, because they’re in less of a position to borrow and afford the mortgage. Meanwhile, the higher-earning partner gets less equity, because their wages mean they’ve got greater borrowing power, and a greater ability to pay it back.
It can be tough for the higher earner to wrap their head around the fact that a fair split doesn’t always mean 50:50. Why should they get less than half?
It’s in their collective best interests to co-operate – and they need to keep that in mind when the pressure hits.
The same goes with divorce. Even at the best of times, divorce is expensive and emotional and draining.
Can I use my KiwiSaver to buy my partner out?
The short answer is: possibly.
For anyone who already owns a property, tapping into your KiwiSaver is done via something called a “second chance” withdrawal.
Applications are made to Kāinga Ora, which will assess your eligibility based on your cash and income situation. Having a lot of equity in your existing property is fine, as long as that hasn’t translated to cash in the bank.
In short, what the agency is doing is working out whether (or how much) you look like a first home buyer – and most divorcees do. If you can clearly show that your KiwiSaver will help you to buy out the home, and create stability for your kids, that’s going to help your chances too.
Annoyingly, Kāinga Ora won’t grant an approval until it’s seen a signed separation agreement, even though having that approval is going to be key in negotiations to buy your partner out.
John Bolton founded Squirrel in 2008. He is a former General Manager at ANZ, where he was responsible for the bank’s $60bn of retail lending and deposits. He has 10 years of senior banking experience behind him in financial markets, treasury, finance, and strategy, and is a director of Financial Advice New Zealand, the industry body for financial advisers. Check out Squirrel’s website for how Squirrel helps first home buyers, here.