Buying Out A Partner On A Mortgage
How to buy out a partner on a mortgage
Around half of Australian marriages end in divorce and many more de-facto couples separate after buying their family home.
So what can you do with your home and investment properties when you go your separate ways?
Can I remove my partner?
Yes, you can remove your partner from your home loan.
However, you’ll need to be able to qualify for the mortgage on your own.
If you qualify then:
- You can refinance and extend your mortgage to 95% of the property value.
- You can increase your home loan to pay out a divorce settlement.
- Your mortgage broker can get you a better interest rate when refinancing.
- You must meet standard bank policy without your partner’s income.
- You may have to pay Lenders Mortgage Insurance (LMI) if you borrow more than 80% of the property value.
The steps to buying someone out
The basic steps are:
- Get legal advice.
- You and your partner should agree on a price or payments to be made.
- Refinance the mortgage (this includes a full valuation).
- Formally commit to a deal with the help of solicitor and a contract rather than a “handshake” deal.
- Settle on the new mortgage.
The pitfalls of buying out your partner
Separation and divorce is a messy process!
Even if you previously agreed on how to split the property, you may still encounter difficulties:
- You may have trouble agreeing on the property settlement figures.
- You may have credit blemishes from unpaid bills as a result of the divorce.
- You and your partner may have stopped paying the mortgage under the advice of your lawyers.
- You may not have been expecting the separation so you may not be ready to apply for a home loan.
These are just some of the challenges you may face when buying someone out of a joint mortgage. Read on to find out how to overcome these challenges.
Will I pay stamp duty?
In most cases, you won’t pay stamp duty to buy out the share of the property owned by your ex-partner.
This isn’t just for the family home but also for investment properties that are bought out from the divorce settlement.
Also, be aware that you may still be liable for Capital Gains Tax (CGT) on the transfer of ownership for any investment properties.
This is a complicated area of law so please talk to your solicitor or conveyancer to confirm if stamp duty will be applicable to the transfer of ownership.
How to calculate your partner’s share in the property
It’s not always going to be a 50:50 split!
The first step is to get legal advice and set up a contract stipulating the agreed price of the property.
This should be based on an independent valuation.
Once the final price has been agreed to, you have to consider what share your partner will receive.
If the property has increased in value, this will obviously be taken into consideration.
However, if you were to go to court to divide up your property, they would also take into consideration the following:
- Contributions by you and your partner prior to purchasing the property including contributions to the deposit and the payment of legal fees and government fees such as stamp duty.
- Contributions made during ownership, including such financial contributions as earnings, savings, gifts, inheritance, mortgage repayments and improvements made to the property and land.
- Non-financial contributions such as being a stay-at-home parent or homemaker need to also be taken into account.
- How much each person could earn in the future.
- The age and health of each person.
- Whether there are dependent children and who will be taking care of them.
- Whether one of you are legal carers for a family member or relative.
- The length of your relationship.
In this way, each party will agree to a split of the property, whether it’s 50:50, 60:40 or 70:30 etc.
Mortgages to pay out your partner
Getting a home loan to pay out a divorce settlement, property settlement or separation agreement is assessed by the banks as both a purchase and a refinance.
For this reason, lenders will assess your loan application in a different manner, applying different lending criteria:
- You’ll need to prove that you have the funds to pay out your partner if there isn’t sufficient equity in the property. This is just like a loan for a purchase.
- Unlike a purchase, you don’t need to prove any genuine savings.
- You must have a good repayment history on your current home loan, which is the same as if you were applying for a loan to refinance a property.
Our mortgage brokers are experts in the policies of more than 40 lenders including banks and specialist financiers. We know which lenders will approve your mortgage, whether it’s to pay out a divorce or property settlement.
Please call us on 1300 889 743 or enquire online and one of our mortgage brokers will call you to discuss the loans that you are eligible for.
Can’t I just "take over" the home loan?
You or your partner may choose to buy out each other’s share of the property or you can sell the home and share the sale proceeds.
The second option is one of the easiest ways to divide assets after a breakup.
What about taking my name off the mortgage?
You can’t just “take over” or remove yourself from the mortgage! Whilst other countries may allow you to take over the mortgage of another person or remove someone from a mortgage agreement, in Australia, this is not permitted.
You’ll need to refinance the loan to a new loan that is solely in the name of the person who will retain ownership of the property.
The reason for this is that the bank must confirm that the remaining owner can afford the debt on their own.
What if I’ve missed repayments on the loan?
It’s quite common for people going through a divorce or separation to miss some of the payments on their mortgage.
In some cases, this is a result of disputes over who should pay, and in other situations, it’s due to emotional turmoil that may cause people to forget about the repayments entirely.
Unfortunately, some lawyers actually recommend that their clients refrain from making mortgage repayments during a divorce!
This is because they believe that the ex-partner is likely to get a larger share of the equity in the property and so any payment on the home loan is money down the drain!
While this advice makes sense from a legal point of view, the partner that buys out the other partner will have difficulty applying for a home loan to complete the settlement
The reason is that they won’t have a perfect repayment history on their current home loan.
Most lenders require a 6-month history of perfect repayments before they will refinance your loan.
Can I get approved if my loan is in arrears?
One of our lenders can accept just a 3-month history of clear repayments as long as you have no other credit blemishes.
We also have access to specialist lenders that can consider your situation, no matter how many payments have been missed! However, you must prove that you were able to afford those repayments even though you didn’t make them.
Please call us on 1300 889 743 or enquire online and one of our mortgage brokers will go through your repayment history and let you know what your options are.
The bank valuation is critical!
As with any mortgage application, if the bank valuation comes in low, then the loan may be declined.
This means that you may be unable to complete your divorce settlement and successfully divide the property.
So how can you control the bank valuation?
The simple answer is that you can’t.
However, as a mortgage broker, we have the ability to order valuations with several lenders before submitting a full application.
You can then apply with the lender that has the most favourable valuation.
In the past, the only way to obtain multiple valuations was to put in multiple applications at the one time.
As such, your loan application would ultimately be declined.
We know which banks will look favourably at your application.
Please call us on 1300 889 743 or enquire online to find out how we can help you obtain an upfront bank valuation.
Do you need a separation agreement?
If you and your ex-partner were married, then a conveyancer can type up a basic agreement and then stamp the transfer as exempt from duty.
A contract of sale is generally not required.
If you and your ex-partner were in a de-facto relationship then you may need to see a solicitor to get a separation agreement completed, otherwise you may be required to pay stamp duty.
An application for an exemption from stamp duty will need to be assessed by the state government.
It must be fully completed and have all supporting documents attached.
A transfer is a document that is lodged with the government to register the change of ownership and needs to be signed by both parties.
There are a variety of agreement types that can be drawn up between the parties to initiate the transfer process. These range from a Separation Agreement or Consent Order to a Financial Agreement.
You can complete your own agreement if you and your ex-partner choose to do so. This agreement can be found in the ‘Separation Kit’ that is on the Family Law website.
Seek legal advice
You should seek legal advice from a qualified solicitor who specialises in family law before you apply for a loan to buy out your ex-partner or before you enter into any agreement with them.
We’ve tried to ensure that the information on this page is accurate but family law is a complex area. For this reason, you must seek professional legal advice in order to obtain specific advice on your transfer of ownership.
Tips on separating from your partner
The Australian Securities and Investments Commission (ASIC) MoneySmart website provides a checklist for someone going through separation.
Some of those steps are listed below:
- Close joint bank account and open up a separate one in your name.
- Consider cancelling your redraw facility or at least ask your lender that any withdrawals require joint signatures.
- Contact the Department of Human Services to find out what payments and services you may be entitled to as a result of the separation, particularly if you have children.
- Divorce doesn’t automatically cancel your will and the beneficiaries you’ve listed so update it with help from your lawyer.
- Update your superannuation details, specifically the list of beneficiaries.
Apply for a home loan
Do you need a home loan to pay out your divorce settlement?
Our mortgage brokers are experts in divorce mortgages and can help you get approved at a great interest rate.
Please call us on 1300 889 743 or enquire online to find out how we can help you.
If you still have questions, feel free to comment below and we’ll get back to you as soon as possible.