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Who pays the mortgage after separation in Australia? A legal guide
Separation is a difficult time for any couple and can be a complicated process to navigate. This is especially true when you own a property and have ongoing mortgage repayment obligations.
By Practice Leader, Sue Foote and Melissa Gok.
Issues around who pays the mortgage or maintenance on the property are bound to arise.
In many separations, one party leaves the former matrimonial property. This may result in that individual feeling as though they should not be expected to continue making payments on the mortgage because they no longer live there. However, no two situations are the same.
Often, the family home is the major asset of the relationship, and parties cannot afford to lose that asset. Yet, they’re equally challenged in meeting the additional expenses that separation brings. So, who pays the mortgage after separation?
Who pays the mortgage after separation in Australia?
If both parties are on the mortgage over the former matrimonial home, each is liable for the mortgage repayment. There is no exemption, even if one of the mortgagors no longer lives there. If the loan repayments are not continuously met, the bank can eventually exercise its right to sell the property to satisfy the debt.
Typically, where both parties earn an income and one person has alternate accommodation, the common arrangement is:
- The party that remains in the former matrimonial property continues paying mortgage repayments.
- Whilst the party vacating typically pays rent and possibly child support.
With larger household debt, increasing living expenses, inflation and increasing interest rates, this is becoming less achievable for now many separating homeowners.
Some issues that commonly arise include
- The leaving party may not be able to afford to pay the mortgage because of the additional expenses they incur; or they are now paying rent, child support and must account for their own living expenses; or
- The leaving party may be able to afford to pay the mortgage but opts not to; or.
- The party residing may be financially dependent on the leaving party to continue making repayments. However, with little to no notice, the leaving party stops such repayment, causing further financial strains between the parties.
3 available options
If you have separated and have mortgage obligations, there are several options available to you:
- Agree to continue to pay the mortgage jointly; or
- Sell the home; or
- One party offers to buy the other party’s interest in the property.
Arranging to jointly meet the mortgage repayments
You could discuss with your former partner whether or not to make payments equally or unequally and what is needed to ensure this takes place and continues until settlement;
Selling the property
Alternatively, if arrangements regarding meeting the repayments can’t be reached, consideration must be given to selling the property. If it is agreed that the property will be listed, arrangements must be made as to how the balance of the proceeds of the sale is to be divided between the parties after payment of all expenses like:
- paying out the mortgage;
- costs incurred in selling the property like agent and conveyancing fees; and
- all outstanding rates and utility payments.
It would be prudent for parties to have these details formalised in a Deed or Consent Order.
If one party buys the other’s interest in the property
It may be that in reaching an agreement as to the division of the marital pool, one party can raise the money or obtain a mortgage to discharge the current, jointly held mortgage and pay the other party for their interest in the property. In bringing this solution into effect, both parties must to agree on a value for the property or jointly instruct a Property Valuer to establish a fair market price.
It would be prudent to formalise this arrangement because stamp duty is waived if the appropriate documentation is in place.
Remedies in the meantime
Often separating parties don’t see eye to eye regarding the treatment of the former matrimonial home or the division of the marital pool in its entirety, and it can take time to reach an agreement.
If both parties find themselves under financial strain due to the necessity to support two households, the ownership of the property may be preserved by approaching the mortgagee and making an application for Hardship arrangements to be put in place.
Subsequently, this means that the mortgagee may agree to reduce the repayments to interest only, halve the repayments or make some other arrangement for a specific period. Be aware: This is only a temporary fix, and there are sometimes some ugly side effects, like an increased payout figure or the potential for damaged credit ratings. Yet, in many cases, this is the only viable option to retain the property.
The “clean break” principle applies in Australian family law, which means that the ultimate goal is to sever all ongoing financial ties between former spouses/partners and divide the marital pool on a final basis.
Each of the above options raises unique challenges, and specific arrangements must be made. Watts McCray has a team of professionals experienced in assisting with navigating difficulties like making arrangements to ensure the mortgage repayments are met until the parties reach an appropriate property settlement.
