Going through a separation or divorce can be a highly emotional time, and deciding what to do with your jointly owned property is one of the more unpleasant things you’re likely to have to do. Keeping things civil and having a written agreement already in place would be to everyone’s benefit, but many couples never make such provisions for various reasons.
If that relationship breaks down you basically have three choices, one of which will hopefully be mutually agreeable: you can sell the property and share in the proceeds, your partner can pay you out of your share of the property or you can take over their share of the home loan and continue to pay it off on your own.
Buying someone out of a house is a process not necessarily confined to a partner either. If you have any type of co-ownership agreement including a joint tenancy or tenancy in common with a friend or relative, you may also want to buy them out of their share.
How do you calculate the cost of buying someone out of a house?
The first thing you’ll need to do is get an independent valuation that you both agree on and go from there. If, for example, the house is valued at $800,000 and there’s still $450,000 owing on the mortgage, the equity in the property is $350,000. This means that, in a joint ownership arrangement, you owe your partner half of that amount, or $175,000, to buy them out.
If you can agree on a price, that will undoubtedly make the whole process go a lot more smoothly. But if you can’t and the issue ends up in court, there are a number of factors that will come into play, such as:
- your individual contributions at the outset including the deposit, stamp duty, legal fees and other fees
- contributions to the total mortgage repayments
- contributions to renovations and general home improvements
- the number of dependent children, if any, and the ongoing costs of raising them
- contributions to stay-at-home parenting
- the age and health of each partner
- the ability of each partner to earn in the future
- the length of the relationship.
Once all these factors are taken into account, the court may then determine to split the proceeds.
If your ex-partner doesn’t want to sell the house in the negotiation process, you may have to get an order from the Family Court to force the sale as part of your property settlement. Additionally, if there is no equity in the house at the time of separation, you could agree to keep the joint tenancy arrangement going, as there’s nothing in the law that says you have to change the property’s ownership once you separate.
How do you buy your partner’s share of the house?
You would think that buying someone out of their share of a property would be a fairly straightforward process, but that is not the case. Buying someone out means taking over their share of the debt, which means refinancing to a new mortgage that is solely in your name, either with your current lender or a new one.
The reason you’ll need to do this is because your lender will want to confirm that you can afford to repay the debt on your own, which means meeting the requirements of sole ownership with your own salary, assets and debts without those of your partner, which would have been factored into your existing mortgage.
In other words, to become the sole mortgagee on your property you’ll need to qualify for the home loan again, which may not be as easy as it was when you entered into a joint arrangement with two incomes.
That also means you’ll need a 20% deposit on the new mortgage or else you may have to pay lenders mortgage insurance (LMI) or find a guarantor. This is why many individuals in such a situation opt to sell the property instead of taking on a larger mortgage commitment.
Pros and cons of buying out your partner
There are pros and cons to buying your ex-partner out of a house but, once again, before you apply for a whole new mortgage, you should speak to a solicitor who specialises in family law and property.
You can refinance the loan: Taking out a new mortgage allows you to refinance your loan, which could have a range of benefits depending on your circumstances. These include a better interest rate, moving to a fixed-interest loan, lengthening or shortening the term of the mortgage, or even extending out your loan-to-value ratio to up to 95% of the loan if you can find a willing lender. Keep in mind the costs associated and the possibility of mortgage insurance. Refinancing also gives you the opportunity to use a mortgage broker to find you a highly competitive deal.
No stamp duty: Generally speaking, you won’t have to pay stamp duty again when paying out an ex-partner in a divorce settlement, or following a separation after you refinance your mortgage on the property you’re living in. There may be exceptions, though, so check with a solicitor.
You can increase the loan to pay out your divorce settlement: Depending on your financial circumstances, you might be able to extend your new mortgage so that you have money left over to pay out whatever divorce settlement you agree on in full, as well as your ex-spouse’s share of the property.
Disagreements over the property’s sale: As already mentioned, you may find yourself in disagreement over selling the property in the first place or when to sell it, which could add to whatever financial stress you may be experiencing. Under such circumstances, you may need to engage a solicitor and get the Family Court to enforce a sale, which could be costly and time-consuming.
Protracted delays over settlement: Likewise, your ex may seek to delay settlement for as long as possible over what’s contained in the agreement, seeking a more generous offer, which could make the whole mortgage process drag out for much longer.
Difficulty finding the deposit for the new mortgage: As mentioned above, your new financial circumstances may not allow you to take out a new mortgage with a 20% deposit, which could jeopardise your chances of obtaining a mortgage altogether or force you to take out LMI to qualify. This is especially true if the new valuation of the property is less than you were expecting.
Difficulty making repayments on the new mortgage: With the new mortgage you have to make repayments by yourself, which might be very difficult after you’ve been used to servicing the loan with two incomes.