The latest numbers from Statistics New Zealand tell us that, these days, roughly 1 in every 130 marriages or civil unions end up in divorce.
Even when a split is amicable, the process of working out who gets what—and where to next—is likely going to raise a whole lot of questions.
Like, what happens if you and your partner own a home and have a mortgage together? Who's responsible for the mortgage payments? What are your options? What if you want to stay in the family home?
Well, we’ve got you covered. Here’s a list of the most common questions we get from Kiwi homeowners about exactly what happens to your mortgage in a divorce.
When's the best time to get a mortgage adviser involved?
Basically, the sooner the better—don’t wait until everything’s already cut and dried through your lawyer. You’ll still need to get a solicitor involved at some point, of course, but first, let us work with you to help find the best possible solution.
In the very early stages, when you’re still deciding who gets what (and who stays where) a mortgage adviser can help you run the numbers to work out what you can afford as an individual, and what your options are.
If you’re in a position to buy out the family home, we can provide guidance on how to go about that. If you want to buy elsewhere, we’ll help you get your head around stuff like property values, locations, property types, and the auction process, to get you into your own home.
As long as you’re on speaking terms, coming to see us together will always be a huge plus, but we can make it work either way.
Who's responsible for paying the mortgage when a couple first splits up?
At first, nothing really changes from a legal perspective.
If you bought the property together, and both your names are on the loan documents, you’re both still equally liable for the mortgage payments.
Should one of you want to continue living in the home while you work through the legal and financial stuff, that can be a little tricky to navigate—and you'll need to decide whether that person will pay rent until everything's finalised.
Then, the big question: to sell up or buy out?
A bit further down the line, when it comes to the legal separation and division of assets, the property will need to be sold.
Most of the time—especially when there are kids involved and stability is a top priority—one person will want to stay on in the property. And that means you’ll (most likely) be looking at buying the other party out in a private sale.
In order to go down this route, you’ll need to be confident in your ability to afford the existing mortgage, plus whatever extra you’ll need to borrow to buy your partner out of the property. The process can get a little complicated—and having a great mortgage adviser at your side can make all the difference.
If neither person wants the house, or the one who wants it can’t afford it, it’ll need to be sold on the open market. In this case, everything’s pretty cut and dried. The net proceeds from the sale are split, and both parties go on their way.
Should you opt to sell up, you'll probably be looking at buying a much smaller house in the same area or going somewhere more affordable to buy a similar-sized property.
What's involved in buying someone out of a property?
It’d be awesome if it were as simple as just getting the other party taken off the existing mortgage, and off you go—but there’s a little more to it than that.
You'll need to apply for a new mortgage and do a full credit assessment, so your lender can work out your borrowing power as an individual.
There are two main things your lender’s going to be looking at here.
1. The size of your deposit
This is largely about your share of the equity you've built in your home—i.e. what the property is worth, less what you owe on your existing mortgage.
As long as you’ve been in the house for a few years (we’re talking pre-COVID), you’ll probably be pretty well set, with a decent level of equity to play with.
For those who bought at, or near, the peak of the market in late 2021, recent house price falls have likely chipped away at your equity, potentially even leaving you in a negative equity scenario.
In this case the best way forward (at least financially speaking) probably means holding onto the property for a bit—getting some tenants in if neither of you want to stay in the home—until house prices have recovered somewhat and you’re back in the black. Then you can look at doing the legal and financial separation after that.
Depending on your financial situation, you may also have the option of tapping into your KiwiSaver to add to your deposit. We’ll come back to that a bit later.
2. Your affordability (in terms of ongoing costs and expenses)
The bank will also need to do a deep dive into your financial situation (your income, expenses and credit history, any skeletons in the closet) to make sure you’re going to be able to keep up with mortgage repayments.
The whole process can be a little complicated—but a good mortgage broker can help you navigate it, so it’s best to get one on board as soon as you can.
One of us earns more than the other—how do we decide on a fair way to split the equity in our home?
This is a really common scenario, but it does add another layer of complexity.
If you had a property sharing agreement put in place when you bought, referring back to that should always be your first port of call.
Otherwise the goal, ideally, should be to settle on a way forward that gives both parties the best chance of getting back on the property ladder.
Usually—not always, but usually—that looks like the partner with the lower income getting more equity out of the transaction, because they’re in less of a position to borrow and afford a mortgage.
The higher-earning partner agrees to take less equity, because their wages mean they’ve got greater borrowing power and therefore a greater ability to pay the mortgage back.
It can be tough for the higher earner to wrap their head around the fact that a fair split doesn’t always mean 50:50.
But even at the best of times, divorce is expensive and emotional and draining—so if people can be reasonable and fair and give up wanting to get one over on each other, you’ll always get much better outcomes (including a lot of money saved).
It might always not be possible, or appropriate, but cooperation is best if you can manage it.
So, what does that actually look like? Let me give you a hypothetical…
Say the couple in question have two kids. They’ve agreed they want to keep the kids in the family home, so there’s no need to uproot them to a new school or neighbourhood.
In the divorce, one parent takes full custody. That means they’re going to have higher fixed expenses, and because they’re working reduced hours to take care of the kids, their income’s lower too. All these things reduce their borrowing power. They do get child and spousal support from their ex-partner, though, which counts towards their income, on top of their salary.
For the other parent, although they earn more and have fewer expenses, the cost of child and spousal support is a pretty massive financial commitment, so that reduces borrowing power from their side, too.
The best outcome here might involve a 60:40 split, where the higher earner leaves more money in the house. That reduces the amount their ex has to borrow to buy them out of the family home, making the mortgage affordable, so they (and the kids) can stay put. In return, they agree on lower child and spousal support payments, meaning the higher earner has lower financial commitments, and can borrow more to get into a home of their own.
That’s a win for everyone.
What other options do we have to keep the lower earner in the family home?
One option is for the higher earner to agree to leave more equity in the home for a certain period of time. That could be via a deed of debt, set at no interest or very low interest, which gets repaid in a few years’ time, perhaps when the kids are leaving home.
Another option is a shared equity agreement.
This is where the higher earner is taken off the title, but agrees to leave a certain amount of equity in as a percentage of the property value. In return, they get that percentage share of capital growth in the property, either when the partner buys them out down the line, or when the property is sold.
Can I tap into my KiwiSaver to help buy my partner out of our home?
The short answer is: possibly.
If you already own a property, tapping into your KiwiSaver is done via something called a “second chance” withdrawal.
Applications are made to Kāinga Ora, who will assess your eligibility based on your cash and income situation. Having a lot of equity in your existing property is fine, as long as that hasn’t translated to cash in the bank.
In short, what they’re doing is working out whether (or how much) you look like a first home buyer—and most divorcing couples do. If you can clearly show that your KiwiSaver will help you to buy out the home, and create stability for your kids, that’s going to help your chances too.
Annoyingly, Kāinga Ora won’t grant an approval until they’ve seen a signed separation agreement, even though having that approval is going to be key in negotiations to buy your partner out.
This chicken and egg situation can be frustrating, but your broker will be able to help you navigate it.
The other important thing to keep in mind is that, in a divorce, any KiwiSaver contributions and returns you’ve accumulated over the course of the relationship are typically treated as a shared asset.
That means, unless you’ve got a prenuptial agreement in place which says otherwise, your KiwiSaver balance will be subject to an equal split between partners—meaning you may be left with more (or less) to play with.
At Squirrel, we specialise in supporting people through the entire house-buying process—including starting over. Get in touch today to find out more about how we can help.