Buying out a partner on a mortgage

July 16, 2020

couple going through relationship breakdown

For many people, buying a new house will be one of the biggest transactions that they will ever make. Making such a large purchase can often be a stressful and financially straining process. Purchasing property with a partner can make it more achievable to save the required deposits and afford loan repayments. However, the reality is that such relationships can break down and leave you with a nasty property dispute as well as confusion over your mortgage. So how do you go about buying a partner out of a mortgage if that time comes?

Transferring the property title from a joint mortgage to an individual one is not as simple as it might sound, as you cannot simply remove your partner or yourself from the mortgage. The original mortgage will need to be refinanced to an individual loan and you’ll need to prove to the lender that you can make the repayments on your own.

Assuming that some of the existing mortgage has been repaid, you’ll have a portion of the existing equity to help you refinance. Depending on the lender, you may also be able to borrow up to 95% of the property’s value. Because of this an application for a new individual loan isn’t treated exactly the same as your initial loan. There are a few options available to buying your partner out of your mortgage:

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If you wish to remain in your property, you’ll need to apply for a refinanced loan on the existing property title and will have to prove to the lender that you are capable of managing the repayments alone.  

Similarly, if your partner wishes to remain in the property and is able to prove their ability to manage mortgage repayments, they can buy you out of the existing loan.

This is generally the easiest way to divide assets, particularly during a divorce. Either party is free to apply for an individual home loan and make an offer on the property if they wish, but without liquid equity from the property sale, this can be difficult for many people.

A mortgage broker can help you work out which options are available to you and how to apply for the appropriate loan.

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  • Seek legal advice- If you are separating assets as part of a divorce, talk this through with your solicitor and discuss your existing involvement in any properties.
  • Come to an agreement with the partner on who will retain the property and how the process of refinancing the mortgage will work out for the both of you.
  • Draw up a formal separation agreement with the help of a solicitor that outlines your asset split. This is important as it could potentially  save you from paying expensive stamp duty fees. It should be noted that this only applies in the case of a divorce.
  • Refinance your mortgage with your chosen lender, ensuring you are able to make the repayments alone and that a full valuation of the property is completed.

Splitting any shared assets is not as simple as evenly dividing the value of the assets between the two parties. When considering what would be a fair price on your property, there are a few things that might come into consideration:

  • Did both parties contribute evenly to the initial deposit on the property?
  • Did both parties contribute evenly to the stamp duty or other tax and fee costs of the original purchase?
  • How have the mortgage repayments been split between both parties?
  • How much has each party contributed to any necessary maintenance, repair costs or upgrades to the property?
  • What is the property’s current market value as opposed to the price paid for the property?

There may be other factors in your relationship that you want to consider, such as the non-financial contributions of each party, a pre-nuptial agreement, the future earning potential of each party, and if either party is the primary carer for other family members.

Every couple allocates these costs differently and if you are having difficulty coming to an agreement on the ownership split of your property, it could be beneficial to consult a lawyer.

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Generally changing property ownership would incur stamp duty or land tax costs which is between 3-5.5% of the purchase price. However, these costs can be waived if the property is being divided up as part of a divorce settlement and you can provide a formal separation agreement.

The seller may also have to pay capital gains tax (CGT), particularly if it is an investment property.  This is usually around 25% of the property value but is dependent on the individual’s income as it will be  included in their annual income tax. It could be beneficial to consult a  broker who has a good understanding of the taxes in your state.

Both parties may also have to pay legal and valuation fees, and fees to the lender such as refinancing fees. The buyer will also need to be able to cover the full cost of the new loan going forward. It’s important to factor these costs in before committing to buying a partner out of your mortgage.

Applying to buy a partner out of an existing mortgage is a little different to applying for the initial mortgage as it is treated by the lender as a combination of both a purchase and a refinancing. Because of this, the lending criteria will be slightly different. Such criteria may include:

  • Assessing whether you have sufficient funds to pay out your partners share of the property if there isn’t sufficient equity in the mortgage.
  • Assessing your existing repayment history on the current loan to make sure you’re a good borrower.

Unlike applying for a mortgage, you won’t need to prove any genuine savings for a deposit.

You’ll also need to pass a bank valuation to have the new loan approved if the property fails the valuation and the loan is not approved you may not be able to divide the property.

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Some lawyers may suggest that you pause your mortgage repayments over the course of the divorce proceedings if they believe your partner may get a larger share of the property’s equity in the settlement. It’s important to be aware that this might impact either partner’s ability to secure a refinanced loan. If you are hoping for a smooth settlement, it might be beneficial to stay on top of mortgage repayments throughout the separation process but it’s always best to seek legal advice for your individual situation.

Words by Danielle Austin

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