Divorcing? What happens to your home mortgage?
Recessions are not the best times for keeping relationships together. The extra pressures encountered when the finances are under strain can mean that a separation or divorce is the only meaningful answer to a peaceful and happy future life.
But the tendrils of a lifetime of living together go deep, and an effective split requires that the financial aspects are properly addressed, so as not to haunt either of the couples in the future.
Joint And Several Liability Is The Main Issue
Most couples borrow to buy their home and mortgage funding, where the lender takes a legal charge over the property as security. There are many advantages for having both partners as joint and several borrowers even if only one is earning. This helps pass title to the home should either die and provides additional security of tenure for both.
But being jointly and severally liable means that both parties are equally liable for the outstanding loan. So if the borrower falters in payments, the lender can chase both the partners for the arrears and the balance.
Split Should Be Financially Effective
Separation or divorce should happen in a financially clean way. Where a mortgage is concerned that means one of a few options should be taken.
Selling the home and paying off the mortgage is the first and obvious way to clear the debt. Any surplus proceeds can be split between the former partners, each with a sum of money and free to move on to a new life.
But it may not be practical to sell the family home as property prices may have fallen or it makes sense for one to continue to live there. In this case, the remaining partner should `buy out’ the interest of the other so that there is no residual financial link to the mortgage. Should there be a payment default later, even in many years’ time, the partner that has left the house can still be held liable for the financial consequences? So getting this aspect bolted down is essential.