The three situations
Keeping the home and buying the other party out. The existing loan is refinanced into one name for a larger amount: the current balance plus the payment to the departing partner. The lender values the property, usually lends to 80 per cent of that valuation without mortgage insurance, and assesses the whole new loan on one income. The equity calculator shows what 80 per cent of the valuation leaves after the current loan.
Leaving, and buying again with the settlement. The settlement payment becomes the deposit on the next purchase. Until the property settlement is paid, or the existing loan is discharged, most lenders count the old loan as a liability against your income, which is the part that most often stalls a new application.
Selling and splitting. The simplest in lending terms: the loan is repaid at sale, each party starts clean. The question becomes what each can borrow alone, which the borrowing capacity calculator works out the way an assessor does.
What a lender counts as income after separation
- Salary as usual, with the same shading of overtime, bonus and commission.
- Child support received is counted by most lenders, usually where it is formally assessed or in a registered agreement, where the children are young enough for it to continue for a few years, and often at a shaded percentage. Private informal arrangements are counted by fewer lenders.
- Spousal maintenance is treated similarly, with a stronger preference for court orders or binding agreements.
- Family Tax Benefit is counted by many lenders with children's age limits.
- Child support paid is an expense, deducted from income in the assessment.
Lenders differ on each of these, and the difference between them can be the difference between the buy-out working on one income or not. That is the reason to have the lending assessed before the figure in the agreement is fixed.
The order things happen in
- Agreement on the figure. A property settlement by consent orders or a binding financial agreement sets who pays what. Lenders want to see this document, or at least a draft, before formal approval of a buy-out loan.
- Valuation. The lender's valuation sets the 80 per cent line. It is often lower than the figure the parties used; the difference comes out of the deposit or the loan size.
- Application in one name. Assessed on one income, with the departing partner's share of the existing loan treated as repaid at settlement. The lender needs both parties to sign the discharge of the old loan.
- Settlement. The new loan pays out the old loan and the departing partner in one transaction; the title transfer is handled by the solicitor or conveyancer. Transfer duty is exempt in most states for transfers under a court order or binding agreement.
Timing. From application to settlement is usually three to six weeks once the agreement exists. Where a court order sets a date for payment, the finance needs to start well before it.
Things that catch people out
A joint loan with arrears from the separation period affects both credit files. A departing partner who stays on the loan after moving out remains liable for it and has it counted against any new borrowing. A pre-approval taken out before the settlement is paid can lapse before the purchase. And a buy-out at a figure the lender's valuation does not support leaves a gap that has to be found in cash.
The lending side of a separation is a sequence rather than a single decision, and understanding the sequence before the figures are agreed is what keeps it calm.