Dividing The Family Home
When there is a house (or real estate) involved, there are 2 options:
- One of you can keep the house
- You can sell the house to someone else; or
Option 1: One Of You Keeps It
Generally, most couples prefer to keep the house in one of their names.
Often it is more convenient for the children to remain living at the family home, and it can be a hassle to find another house and move.
Many people own the family home jointly, which means that both the title and the mortgage are in joint names. When you separate, you need to transfer both the mortgage and the title from joint names to one person's name. This process is called refinancing and is explained further.
You also need to consider what a fair payment will be from the person keeping the house to the other person (e.g a cash payment to the person who is giving up their interest in the property).
What Is Refinancing?
If you want to keep the house, chances are you will need to take over the current mortgage attached to the property. This process is known as refinancing the mortgage.
When a refinance occurs, the old mortgage is discharged (e.g. cancelled) and a new mortgage is created. When a mortgage is discharged, a person who is under the old mortgage (e.g. your former partner) is released from liability - so that means they are no longer responsible for it.
A mortgage can be refinanced to a different lender or even the same lender.
In the context of separation, it normally involves a mortgage in joint names being transferred to one person's sole name - as well as the title to the house being changed from joint names to one person's name.
Can You Afford To Take Over The Mortgage
If you want to keep the house, you should consider whether you are able to make all the mortgage repayments by yourself.
Factors that influence this are the amount of other loan repayments, your income, your personal savings, your monthly expenses and the amount of equity in the property.
Speak To Our Mortgage Brokers About Your Options
If you are considering taking over the house and mortgage, then the best place to start is to speak to one of our mortgage brokers about your options.
Our mortgage broker service is free to you.
Our registered brokers can have a discussion with you about your borrowing capacity, narrow down mortgage options from a variety of lenders, and even obtain pre-approval.
Pre-approval is basically a lender saying they will give a loan for a certain amount, subject to certain conditions being met, which normally involves getting consent orders or a binding financial agreement (more on this below). Getting pre-approval is a excellent indication that a loan will be given.
Read here about how our mortgage brokers can help you with refinancing your mortgage.
Consent Orders & BFAs
In order to refinance, the bank will require consent orders or a binding financial agreement (BFA) to be provided in order to finalise the loan.
Consent orders and a BFA are the only two ways to make an agreement with your partner, about dividing your assets and debts, legally binding.
Learn more about consent orders and BFAs.
Get a 30% Discount Off Consent Orders
Most people who are refinancing choose to get consent orders done instead of a BFA (as it generally costs less).
If you use our mortgage broker service, then you can save 30% off your consent orders. We will refund you this money at the time your loan settles.
At MK Legal, you can get the consent orders and your refinancing done, all in one place.
You can read more about this discount.
Payment For The Equity
If you’re keeping the house, then you need to consider if any payment should be made to your partner. This is a payment for them transferring the equity in the house to you.
Equity is the difference between the current value of the house and the current outstanding mortgage. It is basically the amount of money you would get if you sold your house and paid off the mortgage (less sales fees etc).
If the house has negative equity, then you may not need to pay anything to your partner (because the mortgage is higher than the house value).
If the house has positive equity, then you can negotiate between yourselves on what is a fair payment to your partner for transferring the house to you.
The best way to determine a fair payment price is to get an independent sworn valuation on the property. That will determine the current market price of the house and you can use that to decide the payment figure. A sworn and independent valuation report costs between $500 and $1,000. This is not a required step and many people don’t do this.
You can determine the value of the house in other ways such as getting a few appraisals from real estate agents in your area (e.g. written opinions from agents on what it could sell for), using online valuation tools or even getting a bank valuation from our mortgage brokers (who have access to the valuation portals used by the banks).
If you’re both comfortable with the value assigned to the house, then that might be satisfactory to have a discussion about this payout figure.
Option 2: Sell To Someone Else
Selling the house means putting the house on the market and selling it to an independent buyer.
Which Agent To Use?
If you choose to sell the house, you and your former partner need to decide on a real estate agent. This decision is best made by both of you together.
The real estate agent should be independent and have no previous relationship with either of you.
Cannot Agree On An Agent To Use?
If you and your former partner cannot agree on a real estate agent, here are some options to break the deadlock.
One of you prepares a list of 3-4 agents, then the other one picks one agent from that list.
Another option is to get the peak Real Estate Institute in your State or Territory to select an agent for you, that way the decision is made by someone else. In WA, its REIWA.
If you decide to sell the house, you and your former partner should take into account the amount of equity in the house. Remember, equity is the difference between the value of the house and the outstanding mortgage.
If There’s Negative Equity
Negative equity is when the value of the house is worth less than the mortgage. For example, if the house is worth $450,000 and the mortgage owing is $500,000, there is negative equity in the house of $50,000.
When this situation arises, consider whether you and your former partner are able to delay selling the house until prices in the market rise. If you do choose to delay selling the house, consider how the mortgage will be repaid in the meantime, and how much you each will pay. This should be recorded in consent orders (or a BFA) to make sure you both do what you agreed to do.
Another option is to take a loss on the property. This is when you and your former partner sell the house but still have some mortgage debt left over after the sale. The smaller leftover mortgage debt might be more manageable and easier to repay.
Arranging A Sale
Once you both have agreed which real estate agent to use, you need to consider how to sell the house.
When selling the house (or real estate), you can sell it through either a private sale or at auction.
Private Sale
Private sale simply means selling the house privately, on the open market, instead of by auction. E.g a real estate agent advertises your property, has house openings and gets offers from potential buyers for you to consider.
With a private sale, you should agree on how long the house will stay on the market. It’s normal to give it at least 3 to 6 months for the house to sell.
You should also discuss the minimum selling price.
You should also discuss what will happen if the house is not sold within the agreed period.
Some options could include: trying a different real estate agent, lowering the price or selling the house at auction
A private sale can be useful if there are no time pressures on either of you.
Auction
An auction can be a good option if you want a quicker sale.
For this sale option, you and your former partner would agree on a reserve price. The reserve price is the lowest price that you are willing to accept to sell the house. A real estate agent will be able to assist you both with determining a reserve price.
A Combination
You could also try a combination of private sale and auction.
For example, you can put the house on the market for a private sale for say 6 months (or whatever amount you agree). If you don’t get it sold within a suitable time frame, you could try selling it by auction.
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