Buying guide

Refinancing your mortgage after a breakup or divorce

What happens to the mortgage when you separate?

Despite the best of intentions, not all business and personal relationships survive the test of time. If the partners own a property together they’ll likely share a mortgage, so what happens to that loan if they break up? In a business partnership, there’s usually a written agreement about what will happen in various scenarios, including if the partners want to go their separate ways. However, when a personal relationship is moving on to living like a couple, the thought of creating a legal property breakup agreement can just seem weird. So when most couples decide to separate or divorce, it can be hard to know where to start, especially if one person has been much more involved in the finances than the other.

This article provides a starting point for couples who own a property, but no longer want to stay together. It may also be of interest if you’re thinking of buying a home together and are just a bit curious about what would happen to the mortgage if you split up.


What happens to the mortgage when you separate?

If you decide to break up and one person moves out, nothing changes with the mortgage at first. If you both signed up for the mortgage, you both continue to be legally responsible for making sure the payments are made on time.

Later, when you legally separate and the relationship property is divided between you, the house will have to be sold and the joint mortgage repaid. If neither person wants to continue living in the house, it can simply be sold on the open market. But if one partner wants to keep the house, you could both agree to a private sale to that person.

Whichever way the house is sold, it’s a bit like there are three owners selling up; each of you plus the mortgage lender. Money from the sale is first used to repay the joint mortgage in full. What remains can be divided between you and your partner. Each of you can then put that money towards a deposit on separate houses, if you want to. As mentioned above, this could mean one partner immediately buying the existing house through a pre-arranged private sale.

The usual application and affordability criteria will apply for any mortgages involved in buying the existing home or new ones. This will include a close look at your finances and what you plan to do when you separate. It can be challenging for one person on a single income to qualify for a mortgage that’s big enough to buy the existing home or something comparable in the same area. The affordability will partly depend on the individual’s income and expenses after the separation. It will also depend on how much is left over after repaying the existing joint mortgage (the equity the couple eventually had in the home) and how the two partners agree to split it.

What is the law around dividing up relationship property?

When a marriage, civil union partnership or de facto relationship ends, the division of property is governed by the Property (Relationships) Act (PRA). In case you’re interested, the PRA defines a de facto relationship as two people aged 18 or older living as a couple, but not married or in a civil union. If necessary, a court can decide whether a relationship is de facto and when it started.

In general, the Act means relationship property will be divided equally if the relationship has lasted more than three years. However, shorter times can sometimes qualify. In exceptional circumstances, a court can divide the shared property unequally. For example, one partner might be awarded a bigger share if roles during the relationship (breadwinner vs homemaker, for example) means they would be left at a serious economic disadvantage.

Does shared property have to be split equally when you break up?

If you don’t want the ‘equal sharing’ of the Act to apply, you can both agree to make a ‘contracting-out’ agreement. You can create one at any time, from before you start the relationship to when you legally separate. Sometimes called a ’pre-nup’ it specifies how you agree to divide your shared property if the relationship ends. It has to be in writing and you must have been given independent legal advice before signing it.

Why would someone agree to less than half the house in a break up?

It’s often said that if you can reach an amicable agreement you’ll both save a lot of stress, time and money. Often couples want to give each other an equal opportunity when it comes to making a fresh start. Depending on each person’s circumstances, equal opportunity may not mean an even split of money from the shared home. This can be particularly true when there are children involved. Here are a couple of examples.

When one person is earning a lot more than the other

When a couple are breaking up it might be their wish that their next homes are of a similar quality and value to each other. They might see that as a fair and desirable outcome. If one person is earning a much higher income, they’ll likely qualify for a larger mortgage, so could buy with a smaller deposit. If they leave more of the sale proceeds for their partner, that person would have a larger deposit, so might end up with mortgage repayments they could afford.

When it’s important that one person can keep the existing home

When there are children involved, it’s often considered desirable for them to stay in the family home or at least the same school zone. This might not be affordable under an equal split of the equity in the home. The partner who won’t be staying in the existing home with the children might agree to leave some or all of their share behind. This would help maximise their partner’s deposit and minimise the required mortgage repayments. The couple might also agree that the extra equity left behind will be repaid at some point, such as when the children finish school or turn 18.


Authors

Murray Joiner
Murray Joiner

Karina Reardon
Karina Reardon

Head of Strategic Partnerships - mortgages.co.nz

Karina has worked in the mortgage sector for the last two decades, and is considered an industry expert. As a content author she has a database of financial advisers who share her weekly commentary through their social and digital channels. A well-respected and popular member of the industry, Karina was recently recognised as one of the ‘Elite women in mortgages 2023’.