Separation or divorce – and your home?
How you should proceed if your mortgage must be readjusted for unforeseeable reasons.
28 Jan 2019
Almost 40 percent of all marriages and partnerships without a marriage certificate fall apart. Emotionally, this often comes as a shock. Additionally, a separation raises many questions about money and joint property. Who can or wants to take over ownership of the home? Costs almost always go up when you have to run two different households. This raises the question of whether one of the two partners can finance the property alone. For example, if the partner who moves out makes alimony payments or if an (off-schedule) repayment of a portion of the mortgage is possible, perhaps with an advance against inheritance.
What happens to the mortgage?
If this is not possible, you will need to clarify what happens with your residential property. For example, who should be paid what share after a sale? This depends on many factors: the marital property regime (generally in accordance with the community of accrued gain), the equity capital contributed, etc. A divorce will usually involve a divorce decree, which regulates all essential questions. Things can be simplified if both partners have concluded a (marriage) contract and already agreed on certain rules for the worst case. This applies all the more to registered partnerships and cohabiting partners – here you're well-advised to draw up a contract that regulates the joint real estate holdings.
There are different options for the mortgage, depending on the individual circumstances:
Transfer to a new property: If the original home is sold and one of the partners buys a new property, they could theoretically transfer the existing financial solution to the new property. Taking into account the circumstances of the new debtor, normal requirements such as affordability and adherence to mortgaging of at most 80 percent of the bank's appraised value should be clarified again.
Change of the debtor: An existing mortgage – even a fixed-rate mortgage with a longer term – can be reassigned and continued. While both partners up to this point were jointly liable and acted as contractual partners, the contract will now be issued to one of the two partners, provided they satisfy the bank's criteria as sole debtor.
Early termination: When a mortgage holder terminates a mortgage early, they normally have to pay the bank penalties. When the financing still has a remaining period to maturity of many years, the so-called prepayment penalty can be very high. In some cantons it can be deducted from taxable income as interest on debt.
Transfer to a new owner: Depending on the case and on the life of the contract, one obvious solution after the sale of the property would be to continue the mortgage at the existing institution and transfer it to a new debtor.
Transfer of the mortgage to a third party
Naturally this will only work if both the buyer and the bank give their consent. The bank will thoroughly check the dossier, the same as if it were new business. The usual requirements such as financial affordability and adherence to lending guidelines must be satisfied in any event. Whether the buyer of a property takes over an existing mortgage depends on the interest conditions and to a large extent on the negotiations related to the transfer of ownership. If the financing was concluded for a longer period of time at a higher interest rate than the current one, the buyer will calculate any additional costs into their purchase offer.
The optimal solution in a specific case depends on numerous factors: financial affordability, the current value of the property, remaining life, costs, tax consequences, provisions in the loan agreement, etc. What is important is that you reach out to the bank as early as possible. Thanks to their experience, a client advisor can be a great help. If the bank is only informed right before the date of the divorce, any questions will need to be clarified under time pressure – and it's then often too late for a sound overall analysis. In practice, a separated couple may also find it helpful to talk over options with their inner circle – such as parents or close friends.