A relationship breakdown can make an already stressful financial situation feel even more complicated. If you own a home together, one of the biggest questions is often what happens to the mortgage.
In some cases, one person may want to keep the property and continue living there. This can mean taking over the existing mortgage and refinancing the loan to remove the other person from the financial arrangement. Depending on the circumstances, refinancing may also provide the funds needed to pay out an ex-partner’s share of the property.
Getting a home loan after separation is possible, but your financial circumstances may look quite different from when you first applied for the mortgage. Your income, expenses, debts and financial commitments may have changed, so the lending options available to you may also be different.
Can you get a home loan after separation?
Yes, separation does not automatically prevent you from applying for a home loan or refinancing an existing mortgage.
The key question is whether you can comfortably meet the repayments on your own based on your current financial position.
When you originally applied for the mortgage, the lender may have assessed two incomes and a particular household budget. After separation, you may now be relying on one income and managing a different set of expenses.
This means the amount you can borrow may be lower than it was when you bought the property.
On the other hand, your circumstances may have changed in ways that improve your position. Perhaps your income has increased, you have paid down some debt or your property has increased in value.
The important thing is to look at your current situation rather than assuming your previous borrowing capacity still applies.
What happens to the mortgage after separation?
Separating does not automatically remove either person from a joint mortgage.
If both people are borrowers on the home loan, both may continue to have responsibilities under that loan until the lender agrees to a change.
This is important because reaching an agreement about who will keep the property does not necessarily mean the mortgage can simply be transferred into one person’s name.
The person who wants to keep the property will generally need to demonstrate that they can afford the loan independently.
This is where refinancing can become an important part of the process.
Refinancing to pay out an ex-partner
One common option is to refinance the existing home loan into the name of the person who will keep the property.
The new loan may need to cover more than just the existing mortgage balance. If the property settlement requires one person to pay the other for their share of the property, the refinance may also need to provide funds for that payment.
For example, imagine a property is worth $700,000 and there is $300,000 remaining on the mortgage.
That means there is approximately $400,000 in equity before allowing for any costs or other considerations.
If one person is keeping the property and needs to pay their former partner an agreed amount, they may potentially refinance the existing mortgage and borrow additional funds to help meet the settlement amount.
The exact amount that can be borrowed will depend on the individual circumstances and the lender’s assessment.
How does equity help when paying out an ex-partner?
Equity is the difference between the value of your property and the amount you owe against it.
If your property has increased in value or you have paid down your mortgage, you may have built up equity that could potentially be used as part of a refinance.
For someone wanting to remain in their home after separation, this can be an important part of the conversation.
However, having equity does not automatically mean you can borrow enough to complete the settlement.
There are two different questions to consider:
How much equity is in the property?
And:
How much can you afford to borrow on your own?
The first relates to the property. The second relates to your income, expenses and overall financial position.
Both need to work for a refinance to be viable.
What will a lender look at after separation?
When applying for a new home loan or refinancing, your current financial circumstances matter.
A lender may consider factors such as:
- Your current income
- Your employment situation
- Existing debts and credit commitments
- Regular living expenses
- The proposed loan amount
- The value of the property
- Your repayment history
- Other ongoing financial commitments
- The amount of equity available
- Whether you can comfortably manage the repayments on your own
Your budget may also look quite different after separation.
For example, you may now have one income instead of two. You may have additional living costs, childcare expenses or other commitments. Alternatively, some household expenses may have reduced.
This is why it can be useful to review your finances carefully before deciding what to do with the property.
What if the existing mortgage is too large?
Sometimes the numbers simply do not work for one person to take over the mortgage.
That does not necessarily mean you have no options, but it does mean it is important to understand the situation early.
If the existing loan and proposed settlement amount are more than you can comfortably afford, refinancing may not be suitable in its current form.
Depending on the circumstances, there may be other possibilities to explore. These could include reducing other debts, considering a different loan structure or looking at whether selling the property is a more practical option.
Understanding your borrowing position early can help prevent you from making plans based on a loan amount that may not be achievable.
Should you refinance before the separation is finalised?
There is no one-size-fits-all answer.
It can be helpful to understand your borrowing capacity early, particularly if keeping the family home is important to you. Knowing whether you could potentially refinance into your own name can help you make more informed decisions about the property.
It is also important not to assume that because you and your ex-partner have agreed on a settlement amount, the refinance will automatically be approved.
The lending assessment still needs to work based on your individual circumstances.
Getting an early assessment can therefore help identify potential issues before you commit to a particular plan.
What if you want to buy another property after separation?
Not everyone wants to keep the existing family home.
You may decide to sell the property and purchase another home that better suits your new circumstances.
If that is your plan, your existing mortgage and any proceeds from the sale may form part of the overall financial picture when considering your next home loan.
Your borrowing capacity may also be different after separation, particularly if you are moving from a dual-income household to a single income.
This makes it worthwhile to review your finances before starting your property search.
Getting a home loan after separation can be possible
Separation can bring a lot of uncertainty, particularly when your home and mortgage are involved. But you do not necessarily have to sell the property simply because your relationship has ended.
For some homeowners, refinancing into one person’s name and using available equity to pay out an ex-partner may provide a way to keep the home.
For others, the numbers may point towards selling and starting again with a different property.
The right option will depend on your income, expenses, existing mortgage, property value, equity and the amount required to complete the financial arrangements.
If you’re considering a home loan after separation, speaking with a mortgage broker can help you understand what your lending position may look like based on your new circumstances. It can also give you a clearer idea of what may be possible before making major decisions about the family home.
