If you have separated from your spouse or de facto partner, deciding what to do about the family home can raise a whirlwind of emotions. Many memories are attached to the family home – good and maybe bad – and while some may want to hold onto the home and all the sentiment that goes with it, others may want nothing more than to move on.
In many cases, the decision is primarily influenced by financial circumstances with the only realistic outcome being that neither party retains the home. If the matter becomes particularly contentious, then the ultimate decision may rest with a Court.
For many reasons, the family home may be held in one name only, in a trust or corporate entity, or jointly with a third party. Despite the strict legal interests, it is important to recognise that when dividing property, all interests in all assets held by the parties to the marriage or relationship must be taken into consideration.
This article outlines some possible outcomes that may be reached when dividing interests in the family home, after discussing some preliminary financial and bank related issues to consider post-separation.
Talking to your financial institution
One of the first property-related considerations after separation should be your banking and finance arrangements. The sooner you communicate with your bank or home loan lender, the sooner you might explore the options available.
Financial institutions are experienced and equipped to deal with financial hardship and relationship breakdowns and have processes to assist parties navigate post separation, particularly when there is a mortgage over the family home. Policies may allow for short-term variations to repayment requirements to assist with cashflow. This might include an interim ‘mortgage holiday’ if you are ahead on payments or possibly a switching from principal and interest to interest-only payments while negotiations are occurring.
While discussing your mortgage matters with your bank, you should also consider:
- closing joint accounts or ensuring any joint accounts that remain open require both parties to authorise transactions;
- cancelling joint credit cards;
- opening individual accounts.
Working through the numbers means having a clear understanding of the balance owing on your loan, the way any offset accounts are set up, and the relevant fees (including early break fees) that will apply if the property is sold and the mortgage paid out.
Getting early legal and financial advice
Even if separating on good and amicable terms, it is important to obtain independent financial and legal advice when negotiating the division of your assets and before finalising a property settlement. Stamp duty concessions are generally available when transferring real estate subject to a family law property settlement, however these concessions cannot usually be accessed unless a formal legal settlement has been properly documented.
Other considerations such as capital gains tax may also be relevant which can have a significant impact on the overall property adjustment. Working with your lawyer and financial advisor will ensure that these matters are properly considered during the negotiation process so as to try and provide the optimum settlement for your particular circumstances.
What are the options with the family home?
Following are some of the agreements that may be negotiated with respect to the family home after separation. The outcome will of course depend on the joint and individual circumstances of the parties and how the negotiations proceed.
- The property is sold, and surplus funds are distributed between the parties. In this case, the parties will need to agree on the method of sale, the agent to be engaged (if any), the value of the property and the listing price. They will also need to try and agree arrangement such as presenting the home for open inspections. After the house is sold, the home loan, agent’s commission and any other fees are paid from the proceeds of settlement and the balance is distributed between the parties in the proportions agreed.
- One party buys the other party out. In this case the parties must again agree on a value for the home, or if an agreement cannot be reached the value may be determined by an expert. The party wishing to retain the family home will need sufficient funds to buy out the other party which will often require refinancing an existing mortgage or granting a new mortgage over the property to obtain the necessary funds to pay out the other party. The feasibility of doing this will depend on the proposed transferee’s financial circumstances and whether he or she has sufficient income to support the loan.
- The parties exchange assets to facilitate a buy-out. If other significant assets form part of the property pool, such as an investment property, substantial share portfolio, business etc, the parties may negotiate a ‘swap’ of assets with or without a monetary adjustment to reflect the respective asset values and the agreed property settlement.
- Sale or transfer of the family home is postponed. While a ‘clean break’ is generally preferable, it may sometimes be beneficial to postpone the sale or transfer of the home. For example, it may be in the best interests of the children to enable them to continue living in the home with a parent for a specified time, or it may not be immediately financially viable (or not possible for other reasons such as required repairs etc) to sell or transfer the property.
In such cases, an agreement documenting these negotiations is still essential which must take into consideration responsibilities for mortgage repayments, insurances, rates, repairs and maintenance.
Of course, there may be variations of these outcomes with each matter considered in light of the parties’ respective circumstances and the financial implications involved. In all cases, it is essential to ensure that the property remains insured and secure and that relevant time limits within which to commence legal proceedings for a property settlement are understood.
What if we were renting?
Not all couples purchase a house together and a long-term rental could arguably be considered a ‘family home’. So, what happens with an existing lease when a couple separate? The rental agreement will need to be updated, with consent of the landlord, if one of the parties has moved out and an agreement reached regarding any bond held. This may require a monetary adjustment between the parties. These negotiations should be documented in writing with the assistance of a legal advisor.
There are always financial implications when dividing property after separation and the family home is no exception. Obtaining professional advice to flag potential issues and consider the effect of duty and taxation on the proposed settlement can help you make an informed decision that delivers the best possible outcome for your circumstances.