Divorce is usually an incredibly stressful, time consuming and brain draining process. Conversations over dividing the kitchenware can be as tense as a peace treaty negotiation – yes, who gets the cutlery IS the hill I want to die on.
Given the energy being allocated to who gets the spoons (I won them in a raffle so it shouldn’t really be in question), getting a mortgage sorted for a post-divorce, single income might feel overwhelming. Your mortgage broker will help alleviate much of the stress and uncertainty; in the meantime here are some tips to speed up the process.
This first part is for those of you that are happily paired up and reading this out of slightly morbid curiosity (welcome!)
When you purchase a home with your loved one, get all financial decisions in writing. If one party is putting in more deposit than the other, decide how this will be treated in future should you need to split the proceeds from the sale of the property. Write the decision down and sign it, preferably through a lawyer. This is especially important if mum and dad have helped towards the deposit and will require the money back upon sale of the property.
These conversations as a couple can be awkward, with some people feeling even broaching the topic is indicative of a lack of commitment to the relationship. A less emotional approach is to see it as a tick box exercise that keeps your finances tidy. Using phrases like “if something were to happen” rather than “divorce” or “break up” also keeps the conversation less emotionally charged.
For a divorcing couple, one may wish to buy the other out of ownership of the family home.
In this instance there are two options; the buyer could apply to take over the current mortgage or apply for a new one. If you are buying your ex-partner out, talk to your mortgage broker as to which option would be best for you.
When applying for a mortgage to be the sole owner of the family home, the key details the bank needs to know are:
Ideally the purchaser would first get a valuation through the bank-approved valuation-ordering system. This provides an independent valuer so the valuation will be valid for applying for a mortgage. If you simply call a valuer directly the valuation will not be acceptable to the bank, meaning you’ll end up paying for another report.
If the party being bought out is unhappy with the valuation, they can choose to order a second report. This should be done through the bank-approved system to maintain independence. If the second valuation is significantly different from the first, an average of the two reports can be settled on as the agreed purchase price. However the bank can only use the valuation with the purchaser’s name on it so an explanation for the difference will need to be provided to the bank. Property valuation is a bit of a grey area but it’s unusual to get a significant difference between reports.
Once a price has been settled on the decision needs to be in writing for the bank to know what has been agreed between both parties. This is typically done via a separation agreement, with independent legal advice received by both parties.
The bank will need to know what additional monthly expenses the purchaser will have as a result of any child custody arrangements, such as daycare or after school care costs, or child support payments. The bank will also need to be informed of resulting employment changes (ie. reduced hours to be available for child care). Get the agreed custody details in writing, even if the child custody arrangements are simple and part of an amicable separation, as the bank often needs a written agreement to be sure the expenses will be stable.
While transfer of property under a relationship property agreement is not generally taxed, the brightline test may apply if the purchaser moves the property to a trust or uses it as a holiday home or investment property. Always seek professional advice as to whether there is any tax that may need to be paid. Consult a lawyer and accountant early in the process to ensure the amount of lending you apply for covers both buying out your ex-partner and any tax you may be liable for as a result of the transaction.
Applying for a mortgage pre-approval during a divorce follows the same process as applying at any other time. You need to show the bank proof of equity and/or deposit and prove your income. See Preparing for Your Mortgage: Documentation.
What is different is the additional documentation often required in order to prove your equity and/or deposit and income to the bank. Providing a signed separation agreement and documented child care costs will answer most questions the bank may have.
While you can get pre-approval for a mortgage based on equity from the planned sale of joint property and the division of assets, the bank will probably not lend to you until the assets have been settled.
With the emotional and financial whirlwind of a divorce, it is worth getting property advice early rather than falling into the vortex of suppositions and guessing as to what your options are and what needs to be done. Talk to your mortgage broker to get a clear path forward for your future. Sorted.org.nz also has some good advice for managing your finances through a separation and divorce.
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