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Dealing with a negative mortgage when going through a divorce

Jodie Humphries avatar
Jodie Humphries
- 6 min read
Dealing with a negative mortgage when going through a divorce

If you’re going through a divorce, you’ll likely work through dividing up all the assets you own jointly as a couple, but what happens to your debts? These are often divided so that one person takes ownership of the whole debt. It can be more complicated when it comes to a mortgage with negative equity.

Negative equity is when the amount you owe on your mortgage is more than the property's current market value. If you’re in the unfortunate situation of dealing with both a negative equity mortgage and divorce, you’ll want to understand what your rights and responsibilities are to ensure you make the smartest financial decisions.

How does regular mortgage payment work during a divorce?

After a divorce, there are a few ways you could handle the division of your mortgage. You could agree for you or your partner to take on the loan, or you could both remain responsible for paying your share of the mortgage. 

If you choose the first option and change the names on the mortgage, it will mean either you or your ex are solely responsible for the mortgage repayments. For this, you may need to refinance the loan in the name of the person who’ll continue to take the responsibility of the mortgage. However, you may still be required to split the property sale profits with your ex. Check with your legal advisors about this.

If you choose the second option, when the property is sold, the profit or the money remaining after the mortgage and other costs are paid for, will get divided between you and your ex. Which of these two options should you choose depends on various factors, including how you were making the repayments earlier in the relationship. 

For instance, if the mortgage repayments were made from a joint account, the court may assume that both parties own the property equally. This means that both partners may be held responsible for making the repayments equally until the house is sold or one of the partners willingly takes over the mortgage. On the other hand, if one partner was making the repayments from their separate funds, they may be considered to own a larger share of the property and held responsible for making future repayments. 

The ownership structure of the property may also be considered when determining how the mortgage repayments would work during a divorce. 

When it comes to property held as joint tenants, it is generally assumed that the property is owned equally by both parties, regardless of how much each party contributed to the purchase price or mortgage payments. However, whether both parties will need to split the repayments or only one of them would be responsible depends on a range of factors, including the length of the relationship, the contributions of each party to the maintenance of the property, and the future needs of each party. 

If a couple owns a property as tenants-in-common and have been making the repayments individually according to their ownership share in the property, the same arrangement may continue after a divorce. Once the property is sold, the proceeds may be divided in proportion to each party's share or interest in the property. 

Alternatively, one party could choose to retain ownership of the property and continue making the repayments after compensating the other party for their share or interest in the property. However, the person moving out may ask to be removed from the mortgage. To remove a name from the mortgage, you’ll need to refinance. However, if the property is in negative equity, you may struggle to find lenders willing to allow you to refinance.

It’s worth remembering that the division of property during a divorce is governed by the Family Law Act 1975. If the parties aren’t able to come to a mutual agreement, the court can direct an equitable settlement after reviewing the circumstances of the parties and with regards to the applicable law from time to time. However, if the couple has a Binding Financing Agreement (BFA) in place regarding the property, it may oust the jurisdiction of the family court.

A BFA enables parties to set out the terms of property settlement between themselves in specific circumstances, such as divorce. If you’re buying a property with your spouse, consider speaking to your lawyer if you wish to enter into a BFA to make sure the terms of the agreements are fair.

How does one deal with property settlement during a divorce in case of a negative equity mortgage?

Dealing with a negative equity mortgage and divorce makes splitting assets a bit more complicated. Negative equity occurs when the mortgage amount of the property exceeds its fair market value. In other words, your property's value has either decreased since you took out a mortgage, or you’ve just borrowed more money than your property is worth.

You’ll often divide the mortgage equally, but if the property has negative equity, this can be difficult to do. You should discuss the division of your property with negative equity with your lawyer and your partner to find the most appropriate solution. 

If you’re looking for a way to settle the mortgage without the hassle of any ongoing repayments to divide, selling off the property could be an option to consider. However, if your mortgage is in negative equity, the sale proceeds of the house won’t likely be enough to pay off the outstanding mortgage, and you’ll need to make up the difference to the lender. 

If your financial situation is good and you can afford to pay the difference, this solution could be workable. However, if paying the outstanding amount on the mortgage is not possible for you, then you need to consider speaking to your lender before selling the property. This is known as a short sale when you sell the property for less than what you owe on it, and the lender, in some circumstances, agrees to settle the mortgage for that amount. While this may seem like a simple solution, a short sale requires lender approval and may affect your credit score as well as your partner’s. 

Generally speaking, you may want to avoid selling a property for less than what you owe on it. If you and your partner aren’t able to decide how to manage the repayments after divorce, you could consider renting out the house to delay selling and use the rental income to make your repayments. 

Depending on how the market fares, you may be able to sell the property for a better price in future. Overall, one can’t really say which is a better way to deal with a mortgage in negative equity, as the right solution for you will depend on your individual circumstances. Speaking to a legal or financial advisor could help you better evaluate your options.

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Product database updated 21 May, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.