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Refinance your home loan after a divorce

Find out how you can refinance your home loan after divorce, or what your other options might be for dealing with your property going forward.

How to refinance your home loan after a divorce?

Divorces and separations are complicated, and even more-so if there’s property involved. Find out how you can refinance your home loan in this situation, or what your other options might be for dealing with your property going forward.

It’s commonly said that one in two marriages end in divorce, and while very few people expect their own relationship to come to an end, separations often come as a surprise. The emotional toll and the stress of divorce is bad enough on its own, but properties and assets can add a whole extra level to this.

For this reason, if you and your spouse or de facto partner currently hold a shared mortgage and are either heading into or are in the middle of the divorce process, it helps to know what steps you can take towards potentially refinancing your home loan in order to navigate your separation as painlessly as possible.

How does refinancing your home loan after a divorce work?

To make this explanation simple, let’s use an example:

Mike and Susan own a property which they purchased worth $600,000. Of this amount, they paid a $100,000 deposit, and borrowed $500,000 to cover the remainder.

They have owned the home for five years, and during this period have paid another $100,000 towards the principal of their mortgage, leaving $400,000 left to be paid off. During this time period, the value of their property has appreciated 10%.

In order to refinance the home loan on this property so that Susan can take ownership of it, she will need to apply for home loan in her own name, this will require here to be able to support the home loan repayments purely on her income alone.

Mike and Susan come to an agreement either privately or through lawyers that they will split all assets 50/50.  The house as its stands has equity of $260,000 which is the difference between the current value of $660,000 – $400,000 current home loan. 

Based on the divorce agreement, Mike is entitled to half of the equity amount which equals $130,000.

Therefore, for Susan to retain the property and refinance it, she will need to get a loan for $400,000 (current debt) + $130,000 (payment to Mike) which equals $530,000. 

What other options are there for dealing with our property during a divorce?

If you and your spouse do not wish to refinance your home loan, the following options are also available:

1. You and your spouse can sell the property.

This option is desirable in the instance that neither you, or your spouse can manage to keep up with mortgage repayments on your current loan alone, or obviously if neither party is willing to voluntarily vacate the house leaving it to the other. In this scenario, assuming you have a reasonable portion of your original home loan paid off, you will receive a sales price that will both pay off the remainder of your mortgage, as well as provide both parties with a lump sum in cash which can be used for a deposit on a new property, or whatever other needs might arise for each individual.

2. Keep the property and continue to share liability for the loan and asset.

Of course, there is nothing to prevent you and your spouse from agreeing to continue shared ownership of the property. In this case, you can both agree to continue paying off the original home loan while generating shared rental income. Another way this is can play out, is that one party agrees to vacate the property while the other continues to live in it, while both parties will continue to contribute to the mortgage repayments and share equity.

Obviously, this type of arrangement appears on the surface to be potentially more problematic than others, however it is important to remember that there is rarely a one-size-fits-all approach to dealing with finances, and that just because one approach to managing your assets is uncommon, it does not mean that it isn’t right for you.

As is the case with most scenarios in finance, common assumptions are subject to details which can be unique from case to case. In order to protect yourself against unexpected events, it is prudent to always consult a lawyer and financial professional when resolving the types of situations outlined above.

Have more questions?

We go through a few more questions that you may have about the process of refinancing during or after a divorce

Can my spouse and I simply agree to remove one of our names from the mortgage?

No, unfortunately, it isn’t this simple. Banks require the mortgage to be completely refinanced under a new agreement with only one party.

What happens if I can’t afford to pay out my spouse?

If you do not have sufficient equity in the property or the funds to successfully buy out your spouse’s portion of it, banks can extend your home loan during the refinancing process in order to provide the opportunity for your loan to be refinanced under only one name.

Will I be able to take on the mortgage under only my name since I am now relying on only one income?

In order for the refinancing process to be successful, you must be able to satisfy your lender’s need to know that you can solely service the repayments on your loan.

If I get bought out of my property by my spouse, will I have to pay any taxes?

Typically, when selling assets or property that is not your primary place of residence, the profits generated from this sale are subject to capital gains taxes. When refinancing your home loan, one party can potentially profit because they are selling their equity in the property to the other. Fortunately, in this specific situation no capital gains apply, so you needn’t worry.

What should I do if my spouse has failed to contribute their portion of mortgage repayments during our divorce process?

In this case, you should immediately notify your lender and consult with a lawyer.

Will refinancing my home loan hurt my credit history?

Under ordinary circumstance, refinancing your home loan shouldn’t negatively impact your credit score, seeing as you are not defaulting on any debt, only restructuring it.