OPINION: Dealing with money matters can be stressful. It’s the reason a lot of people delay setting up a budget. It goes without saying, therefore, that adding a divorce in the mix takes it to the next level.
When one party is purchasing another party out of the family home, there are several things that the bank wants to know in order to approve a mortgage. Here are some tips to reducing wait times and questions.
When purchasing the home, get financial decisions in writing. If one party has put more into the home deposit, particularly early in the relationship, decide how that will be treated in the future and write it down, preferably through a lawyer. This is most important if the Bank of Mum and Dad are helping and require the money back upon sale of the property. Sometimes talking about separation early in the relationship can be awkward. I have seen couples refer to “if something happens between us” as a way of addressing this without using the divorce word.
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When the decision to separate and buy one party out has been made, written documents become even more important. Even if verbal agreements have been made, the bank needs to know the final decision and this is best done in writing, typically a Matrimonial Separation Agreement.
For mortgage applications, the first question is how much the purchase price will be. If required, it’s ideal for the purchaser to order a valuation first and through the bank-approved valuation-ordering system. This provides an independent valuer and will be useable for the mortgage application. Simply calling a valuer will mean the valuation will not be accepted by the bank and could mean having to order another report.
If the second party is unhappy with the valuation, they may choose to order a second report. Again, this should be done through the bank-approved system to maintain independence. If this valuation turns out to be significantly different, an average of the two reports can be done however the bank can only use the first valuation because it is in the purchaser’s name so some explanation of the agreed purchase price will be needed for the bank. While there is a lot of grey area in valuations, it’s unusual to get a large difference between reports.
Next the bank will need to know what child custody arrangements will be in place. Most importantly, what resulting additional monthly expenses will be involved for the purchaser and any changes to employment (ie; do they need to reduce hours for child care). A lot of amicable separations get caught out on verbal agreements. The bank often need written agreements to make sure the payments will be stable in the future.
When applying for the mortgage, always seek advice on any tax that may need to be paid. While transfer of property under a relationship property agreement is not generally subject to a tax liability under the bright-line test, it may be triggered by the purchaser moving the property to a Trust or the involvement of holiday homes or investment properties. It is always best to seek advice from a lawyer and accountant early so that the correct amount of lending can be applied for.
Beyond explaining how your finances will look post-separation, a mortgage as a result of a divorce follows the same path as any other mortgage. Show how much equity or deposit you have and prove how your income will meet the banks affordability calculations.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
