What happens to your mortgage after a breakup?

Divorced couple sitting on couch.

The breakdown of a long-term relationship can be an extremely difficult time, but things are made all the more complicated when you and your partner have a home loan together. 

While lenders are willing to make accommodations given the tough circumstances, there’s still an expectation that your mortgage debt will be paid off. If that’s not feasible, you and your ex-spouse will have to find an alternative.

This might involve selling the property or assuming ownership of your partner’s share. But before we explore those options, we first have to understand the two main types of ownership agreements couples can enter into. They are:

  1. Joint tenancy
  2. Tenancy in common

What is a joint tenancy?

In a joint tenancy, each person listed on the property title has equal ownership. This is the most common type of agreement in Australia, as it’s usually the case that married or de facto partners will share ownership of assets.

Importantly, if one of the owners passes away, the property will be automatically transferred into the surviving owner’s hands. This is known as a right of survivorship, and it overrides any wishes to the contrary the deceased partner might have laid out in their will. 

What is tenancy in common?

Tenancy in common differs from a joint tenancy in a few key ways. For starters, the share of the property owned by each tenant can be equal or unequal. That means ownership can be tilted in one person’s favour, as in an 80-20 split.

The split might be decided by you and your partner or it might be determined by the amount each person contributes towards the mortgage. 

For example, if you’ve paid $300,000 on a $500,000 property, you will be entitled to 60% of the property, while your partner will have a 40% stake.

There is also no right of survivorship in a tenancy in common agreement, so if one owner passes away, their share of the property doesn’t automatically default to the surviving owner. For this reason, it’s a good idea to outline how you’d like to dispose of your share in your will.

So what are the options?

In the event of a separation, both you and your partner will still be liable for the mortgage. But different rules and expectations might apply depending on which ownership agreement you have entered into. 

For example, if you both decide to sell the property, the proceeds might end up being split equally if you have a joint tenancy arrangement. This can be unfair if one person has made much larger contributions towards the mortgage than the other.

Of course, it’s worth speaking with a financial advisor or legal professional if your relationship has hit the rocks and you’re wondering what to do with the mortgage. Some of the more common options are:

  1. Sell the property and move out
  2. Continue paying off the mortgage together
  3. Buy your partner out
  4. Transfer the mortgage to your partner

Sell the property and move out

Sometimes washing your hands of the property altogether can be the least stressful option. But before you and your partner can sell the property to a third party and split the proceeds, you’ll first need to arrange for the mortgage to be discharged.

A discharge of mortgage form should be submitted as soon as possible so your lender has ample time to process it before the settlement date. Once the house is sold and ownership is transferred to the new owners, your lender will collect the money you owe from the final payout.

If the value of the property has appreciated since you purchased it, you and your partner will be able to pocket the amount that’s left over. But if the final sale price isn’t enough to cover the outstanding balance on your mortgage, you might be asked to draw from your savings or potentially sell other assets you own.

Just keep in mind that selling a home with a mortgage will attract a few fees. Along with the discharge fee, you might have to pay a break cost if you have a fixed rate home loan. These will be deducted from the proceeds of the sale.

Continue paying off the mortgage together

Another option is to keep the mortgage and come to an agreement with your partner where you both retain ownership of the property. Couples that separate on amicable terms might choose to treat the property as an investment asset and split any income it generates.

Just keep in mind that if your partner fails to pay their share of the mortgage, you’ll have to cover the shortfall. Falling behind on repayments can dent both of your credit scores, and might lead to your lender taking legal action against you.

Buy your partner out

If your partner is willing to part with their share of the property, you might decide to buy them out of the mortgage. To do this, you’ll need to refinance your loan to a new one without your partner’s name on any of the documents. This is so that your lender can confirm you’re able to service the mortgage by yourself. 

Transfer the mortgage to your partner

Alternatively, you might want to transfer your interest in the property to your partner. In this case, they are the ones who will need to refinance the loan to remove your name and buy out your share. 

If you go down this route you’ll be eligible for capital gains tax rollover relief, which is when a capital gain or loss is deferred or disregarded altogether. According to the Australian Tax Office, CGT will only apply for your partner when they later sell the property (so long as it is transferred under a formal agreement). 

For more information, visit our home loan guides hub. And if you’re in the market for a home loan, browse our home loan comparison page, or check out the selection below.

Home loan comparisons on Mozo - last updated 21 May 2022

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

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