Breaking up is never easy: Navigating mortgages and divorce

Housing Market Written by John Bolton, Dec 20 2021

The latest numbers from Statistics New Zealand tell us that, these days, roughly 1 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 the mortgage? What are your options? What if you want to stay in the family home? We’ve got you covered.

So, what happens to a home and mortgage when a couple splits up?

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’s 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 – and having a great mortgage adviser at your side can make all the difference.

Buying out the other party – what’s involved, and what to watch out for.

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. Massive house price growth in the last few years means anyone going through a divorce at the moment will probably be pretty well set in this sense, with lots of equity to play with.

Looking ahead, it’s a slightly different story. A slowing market means house prices are expected to stay pretty flat over the next five to 10 years, so anyone buying now could end up with less equity if they 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.  

And then you’ve got affordability in terms 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.

Recent 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. Again, a good mortgage broker will help you navigate this – so get one on board as soon as you can.  

The challenge of income inequality – and why working together will always mean the best possible outcome for everyone.

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 – not always, but usually – 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 staggers me how often the person with more turns into a complete bully during the divorce – and the irony is, by dragging it out, they’re just burning their own cash.

I’d call it a classic Prisoner’s Dilemma. Think of two prisoners, partners in crime, being questioned in jail. They’re in separate rooms, so have no way of knowing what the other is saying. If they dob each other in, both go down for the maximum term. If one dobs the other in, they might get off scot-free, but their partner takes the fall. If neither talks or lays blame, they both get the minimum sentence. It’s in their collective best interests to cooperate – 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. 

If people can be reasonable and fair and give up wanting to get one over on each other, you will always get much better outcomes, and a lot of money saved.

The best separations I’ve ever been involved with are those where both parties have been in the office with me, working together to reach the financial outcomes they want to achieve. That might always not be possible, or appropriate, but cooperation is always best.

So, what does that actually look like? Let me give you a hypothetical…

Say the couple in question have two kids. They’ve agreed they want to keep the kids in the family home, so there’s no need to uproot them to a new school or neighbourhood.

In the divorce, one parent takes full custody. That means they’re going to have higher fixed expenses, and because they’re working reduced hours to take care of the kids, their income’s lower too. All these things reduce their borrowing power. They do get child and spousal support from their ex-partner, though, which counts towards their income, on top of their salary.

For the other parent, although they earn more and have fewer expenses, the cost of child and spousal support is a pretty massive financial commitment, so that reduces borrowing power from their side, too.

The best outcome here might involve a 60:40 split, where the higher earner leaves more money in the house. That reduces the amount their ex has to borrow to buy them out of the family home, making the mortgage affordable, so they (and the kids) can stay put. In return, they agree on lower child and spousal support payments, meaning the higher earner has lower financial commitments, and can borrow more to get into a home of their own.

That’s a win for everyone.

There are also other options to help keep the lower earner in the family home.

These involve the higher earner agreeing to leave more equity in for a certain period of time.

That could be via a deed of debt, set at no interest or very low interest, which gets repaid in a few years’ time – perhaps when the kids are leaving home. 

Another option is a shared equity agreement, which means the higher earner doesn’t stay on the title. They agree to leave a certain amount of equity in, as a percentage of the property value. In return, they get that percentage share of capital growth in the property, either when the partner buys them out down the line, or when the property is sold. 

The moral of the story is it doesn’t have to be a lose-lose; it’s just a lot harder to reach a positive solution if the couple are at each other’s throats.

What happens to my KiwiSaver in the divorce? Can I use it to help buy my partner out of our home?

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, who 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 they’re doing is working out whether (or how much) you look like a first home buyer – and most divorcing couples 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 they’ve seen a signed separation agreement, even though having that approval is going to be key in negotiations to buy your partner out. This chicken and egg situation can be frustrating, but your broker will be able to help you navigate it.

What to do if you don’t know where to start.

Once you’ve reached the point where you’ve agreed, broadly speaking, what the ideal outcome is – who gets what, who stays where – it’s best to engage a mortgage broker as early as you can. Don’t leave it until everything’s cut and dried through (eye-wateringly expensive) lawyers but let us work with you to find the best possible solution.

If you’re on speaking terms, coming to see us together will always be a huge plus, but we can make it work either way.

If your partner has tended to take the lead on big financial decisions, like buying a home, we know the whole process can feel incredibly daunting. Maybe you’re even feeling like you actually are a first home buyer.

At Squirrel, we specialise in supporting people through the entire house buying process. If you want to buy out the family home, then we can provide guidance on that. If you want to buy elsewhere, we’ll help you understand everything from value to location, property types, the auction process, to get you into your own home.

Get in touch today to find out more about how we can help.

We can help. Have a chat to one of our advisers.