Home Loan Interest Rates Impacting Divorced Clients
Divorce is undoubtedly one of life’s most challenging experiences, and when it intersects with financial responsibilities such as home loan repayments, the situation can become even more complex. In Australia, where property ownership is a significant investment, the impact of divorce on home loan repayments is an important but oftentimes missed conversation.
Here’s everything you need to know about how divorce impacts your mortgage and equity.
Divorced People are ‘Hidden Victims’ Amidst Rising Interest Rates
In a focus group finding by the Finance Brokers Association of Australia (FBAA), the numbers suggest that aspiring homeowners and current mortgage clients who have recently been through a marriage breakdown are the “hidden victims” during these interest rate hikes.
How so? FBAA managing director Peter White AM said that this cohort of borrowers are most significantly affected across the country. According to White, with lenders tightening requirements and eligibility assessments, those who have recently divorced or separated are finding it very difficult nowadays to refinance or buy out a jointly owned property.
Divorced mortgage customers are blaming lenders for a lack of compassion and consideration for their status.
White noted that these customers are seemingly “paying the price” for being in circumstances that weren’t under their full control.
What are the Options?
It’s a tough climate now in housing, but brokers are appealing to banks to work with a little compassion and flexibility for these clients. After all, it makes no sense why people should be denied if they meet credit score criteria, income, and have a reputable record of mortgage repayments.
Mortgage clients undergoing divorce can explore these options:
Assume the Mortgage
One of the immediate concerns when navigating a divorce and home loan repayments is the potential for changes in mortgage interest rates. Changes in income, creditworthiness, and the financial instability that often accompanies divorce can trigger alterations in the interest rates attached to the mortgage.
In Australia, where interest rates can be subject to fluctuations, it’s essential to be prepared for potential increases. If the mortgage was initially secured with joint income and is now reliant on a single income post-divorce, lenders might perceive an increased risk, leading to higher interest rates.
Keep in mind that the spouse applying for the refinance can only provide their own credit score and income to qualify, which can make it tough to get an ideal rate, much less get approved for a new loan.
Borrowers who separate or divorce must emphasise that they have a good financial standing as an individual, and no longer a joint entity. So, if you plan to refinance, you must show evidence of financial independence in the form of savings, capability of making repayments, and paperwork that you were able to consistently contribute to the previous mortgage. These bodies of evidence signify to lenders that you are prepared to pay off the mortgage on your own.
Consider Selling the Property
While it might not be the first choice, selling the property and dividing the proceeds can be a practical solution in some cases. This ensures a clean break from the financial ties associated with the property and allows both parties to move forward independently.
If the mortgage is in arrears, you may be forced to sell in an amount that wouldn’t be enough to cover the outstanding balance. You have to agree about covering the difference in this case.
Transfer the Mortgage to the Ex-Spouse
If you aren’t willing to take on the mortgage singularly and your ex-spouse is willing to refinance the mortgage, you can take the name off the mortgage and let the ex-spouse assume future repayments. Your name will be removed from the home loan and the property title deed.
This option means you are eligible for capital gains tax rollover relief, meaning you won’t need to pay the tax on your share.
Talk to Your Broker and Lender
The key to managing home loan repayments during a divorce is open communication with your bank. Lenders understand that life events, such as divorce, can impact financial stability. Be transparent about your situation, providing them with the necessary details and any legal documents related to the divorce.
It is a hard situation, but there are lenders who are willing to be flexible during challenging times, offering either loan modification or restructuring to make repayments more manageable. Engaging in early and honest communication can prevent more severe financial challenges down the line.
Relationships unfortunately end, but it does not mean that you must struggle with your home loan arrangements. You can reach out to our mortgage brokers, so you are prepared to make the necessary mortgage changes towards financial independence.
Perhaps a good idea is to speak with us first-as it may help calm negotiations with your bank.
