What Happens To A Joint Mortgage During A Divorce?

What Happens To A Joint Mortgage During A Divorce?

If you separate or divorce and the mortgage is in joint names, you and your ex-partner must continue making your mortgage repayments until you agree to a financial settlement. When a joint mortgage is taken out, both parties have a joint and several liability to make all repayments until the mortgage is fully paid off.

Any missed repayments will harm both of your credit reports, resulting in a lower credit score.

A low credit rating makes it difficult to raise finance in the future, and if you can raise finance, it is likely to be at a higher interest rate.

Divorce can be a very stressful, emotional, and expensive process. There are several charities and organisations that can help and give you advice, including Citizens Advice and Relate.

What Happens To The Property During Divorce?

Once you are at the point of separating, you must make contact with your mortgage company to explain that you are parting ways. Lenders accept that separation and divorce are very stressful and will likely come to an arrangement with you until the mortgage is paid off. One party might move into rented accommodation until a financial settlement is agreed, meaning that there is financial pressure for a while. 

The property remains in joint names until you reach a financial agreement.

Should You Sell The Property When You Separate?

When looking to divide a home when divorcing, there are a few options:

• Sell the property - this is one of the easier options because once the property is sold and the mortgage paid off, the equity can be split between all parties. The amount payable to each party is open to discussion. If a split cannot be agreed, the matter will end up in a divorce court. This being the case, you may need independent legal advice.

• Continue paying the current joint mortgage - this is often a good solution if you have children, as it avoids them having to move out of the family home. You may need to arrange a Mesher Order through the courts in these situations. A Mesher Order dictates that a property cannot be sold until a specific time, for example, when the children reach a certain age.

• Buy your partner out - this would apply if one of you wanted to remain in the property. Switching the mortgage into one name will involve one partner buying the other's share in the property, including the equity. Find out more about borrowing more on your mortgage.

The lender must be happy that the person remaining in the property can afford the mortgage repayments on their income alone. The mortgage lender is under no obligation to agree to transfer the mortgage into either of your names.

If the lender agrees that one of you can afford the mortgage in your sole name, they will need to have the property valued to assess the equity in the property.

Whatever option you are considering, all parties involved should seek independent advice. 

Transfer Of Equity

Transfer of equity is the legal process of taking someone on or off the title deeds of a property.

You would use a transfer of equity in the following scenarios:

• To divide assets as a result of separation or divorce.

• To buy out an equity partner if you are a joint owner.

• To add a new person to the property deeds.

• To be more tax efficient by transferring equity to children or other family members for inheritance tax benefits.

While it is possible to complete a transfer of equity without the services of a solicitor, it is not advised. At some point during the process, some forms are likely to be witnessed by a legal professional.

One form that needs to be witnessed is the transfer deed. The transfer deed can be witnessed by an independent witness who needs to sign the document and provide their name, address, and occupation.

Transfer of equity can be complicated, and you need to understand the various implications and legal requirements, including capital gains tax, stamp duty land tax, and inheritance tax. It’s also vital that any legal documents, including the property transfer, are correctly registered with the Land Registry.

Buyout A Partner

Most couples that split up have financial struggles, one being how to work out how much a partner should be paid in relation to the home's value.

If it’s a straightforward decision to sell the property, the proceeds are often split 50/50. For example, if the home is worth £500,000 and there is an outstanding mortgage of £300,000, on completion of the sale, the equity of £200,000 would be split 50/50, with each party receiving £100,000. Each party could use this £100,000 to purchase a new home.

However, if you agree that one party would continue living in the property, that person would need to raise £100,000 to pay off the partner leaving the home. One way to do this would be to remortgage, which would involve the partner staying at the property and getting a new mortgage of £400,000, sufficient to pay off the current mortgage lender (£300,000) and pay their partner (£100,000). On completion, they would be the sole owner of the property, having bought their partner out.

You should use the services of a professional mortgage broker who can look at the various options available to you, including a transfer equity mortgage, to raise the required finance to buy out a partner.

A mortgage broker covers all types of mortgages, including tenants in common mortgage, personal joint debt consolidation loans, and equity release mortgages.

Will Divorce Affect My Credit Rating?

Changing your relationship status will not directly affect your credit score. Whether you are married, single, or divorced, this does not appear on a credit search and will not affect your credit rating.

It's likely that during your relationship, you will have had a mortgage, loan, or other finance in joint names. Taking out a loan with another person means you are a "financial associate". Any agreements in joint names will appear on your credit report and may affect your score as lenders may consider your and your associate's credit reports when deciding whether to lend or not.

Talk to our expert team today for more advice about remortgaging or taking out a second-charge mortgage.