A divorce agreement or court order stating that the home belongs to one party does not mean that the other party is automatically released from the joint mortgage.
Family law determines how the home and debts are divided between the parties. Whether a bank agrees to release one party from their obligations as a borrower, however, depends on the existing loan agreement and the bank’s fresh assessment of the loan.
Consequently, who ‘receives the home’ and who ‘is responsible for the mortgage’ must not only be stated clearly in a property agreement or court order; those arrangements must also be implemented through changes to the bank loan and property title.
If the home has been transferred to one party but the ex-partner’s name remains on the loan, that ex-partner may remain liable for the loan. If repayments fall into arrears, they may not only face recovery action from the bank but also suffer damage to their credit record and ability to obtain a home loan in the future.
When might it be appropriate for one party to keep the home?
Before deciding that one party will retain the family home, the parties need to confirm its current market value, the outstanding loan and the share of the property each party should receive. They can then assess whether the party retaining the home is capable of refinancing independently.
For example, if the home is currently worth AUD 1.2 million and the outstanding loan is AUD 600,000, the equity in the home is AUD 600,000.
If the parties agree that the person leaving the home should receive AUD 300,000, and the party retaining it has no other property that can be used as an offset, that party may need to assume the existing AUD 600,000 loan and raise a further AUD 300,000 to pay the ex-partner.
The bank will then reassess matters including the applicant’s income, household expenses, credit record, other debts and the valuation of the home.
Even if the joint loan has always been repaid on time, this does not mean that the bank will necessarily approve one party assuming the entire loan alone. Actual borrowing capacity should therefore be assessed before a final decision is made about who will retain the home, rather than deciding solely on whether that party can currently meet the monthly repayments.
The court awarded the home to me. Why can the bank still pursue my ex-partner?
Whether a bank can require a person to continue repaying a loan depends principally on who remains a borrower under the loan agreement, rather than whose name is currently registered on the property title.
If both parties jointly applied for the original loan, they will generally remain jointly liable until the bank formally approves the release of one party from their obligations as a borrower.
Even if a court order provides that the party retaining the home will repay the loan alone, it does not automatically alter the loan agreement between the bank and the original borrowers.
If the party retaining the home later falls into arrears, the ex-partner who has moved out may still receive demands for payment from the bank, and their credit record may also be affected.
Although the ex-partner may seek to hold the other party responsible under their property agreement or the court order, this may not prevent the bank from first taking recovery action under the original loan agreement.
How can an ex-partner be fully released from the home and the loan?
A complete handover of the home generally involves not only a transfer of title but also the concurrent resolution of the loan.
The parties must first formally determine ownership of the home through Consent Orders or a Binding Financial Agreement. The party retaining the home must then obtain the bank’s approval for refinancing and, when the new loan is completed, arrange for the existing loan to be discharged and the property title to be transferred at the same time.
The property documents should therefore do more than simply state that ‘the home belongs to one party’. They should also specify the time limits for refinancing and transfer, the amount to be paid to the ex-partner, who will make the loan repayments before settlement, and which documents each party must cooperate in signing.
The possibility that the bank may refuse the refinancing should also be considered.
For example, the parties can agree in advance whether the home must be sold if loan approval cannot be obtained within the prescribed period, who will select the real estate agent, how the sale price will be determined, and how the sale proceeds will be divided after the loan and relevant expenses are paid.
Otherwise, even after the parties have obtained a court order, the property settlement may remain incomplete for an extended period because there is no alternative arrangement.
Can the home still be retained if the bank refuses the refinancing?
If the bank considers that the applicant’s income is insufficient, their debt is too high or the property valuation does not satisfy its lending requirements, the party retaining the home may be unable to obtain a sufficient loan independently.
In that situation, depending on the parties’ overall property arrangements, they can consider whether the cash amount payable to the ex-partner can be reduced, whether other property can be used as an offset, whether another suitable lender can be found, or whether the ex-partner will agree to extend the refinancing period.
However, an ex-partner will generally have no obligation to remain on the joint loan indefinitely.
If the ex-partner cannot be released from the loan within the agreed period, the home may ultimately need to be sold. The loan can then be repaid from the sale proceeds and the balance distributed in accordance with the property arrangements already determined between the parties.
Borrowing capacity should therefore be assessed when the parties decide who will retain the home, rather than being considered only when the transfer is being arranged.
What time limits apply?
Married couples should generally apply for property orders within 12 months after their divorce takes effect; de facto partners should generally apply within two years after the relationship ends. After the applicable time limit has passed, permission from the court may be required before the matter can proceed.
The Consent Orders or financial agreement may also prescribe specific deadlines for refinancing and transfer, such as requiring one party to obtain the loan and complete the transfer of the home within 60 or 90 days.
If completion by the deadline is not possible, the parties should promptly determine whether they can extend the time or whether the sale arrangements already set out in the documents need to be commenced. The fact that a loan remains under assessment does not mean that the existing deadline is automatically suspended.
What else should be confirmed after the transfer is completed?
After the title transfer is completed, the party leaving the home should also obtain the relevant loan-release or discharge documents from the bank and confirm that their name has been formally removed from the loan obligations.
Merely seeing that the results of a property-title search have changed does not prove that the obligations under the original loan have also ended.
The party retaining the home will also need to update the home insurance, council rates, strata levies, loan repayment account and other property-related records.
If the parties’ existing wills, powers of attorney or insurance beneficiary arrangements involve the other party or the home, it is also advisable to review them after the property settlement is completed.
FAQ
1. My name has been removed from the property title. Why can the bank still require me to make repayments?
Property title and the loan are separate legal relationships. Unless the bank has formally released you from your obligations as a joint borrower, it may still require you to meet the repayment obligations under the original loan agreement even though you no longer own the home.
2. The court ordered that I receive the home. Must the bank approve a loan in my sole name?
Generally, no. The bank will still assess the loan application independently based on factors such as your income, household expenses, other debts, credit record and the property valuation. The court order itself cannot replace the bank’s loan approval.
3. My ex-partner is willing to remain on the loan temporarily. Can the property be transferred first?
Even if the parties can reach such an arrangement, its risks need to be considered carefully. An ex-partner who remains on the loan may continue to face repayment obligations and credit risk, and this may also affect their ability to buy a home or obtain another loan in the future. Even if the parties are currently on good terms, they should therefore specify the deadline for release from the loan and how the matter will be handled if the refinancing cannot be completed.
4. Must the home be sold if the bank refuses the refinancing?
Not necessarily. First check whether the property agreement or court order permits an extension, an adjustment to the payment arrangements or another form of finance. If reasonable attempts still do not result in the ex-partner being released from the loan obligations, selling the home will generally become a more realistic solution.
NS Legal’s Closing Remarks
If you are considering an arrangement under which one party will retain the family home, NS Legal’s family law team can help you assess whether it is practical and enforceable. We can also ensure that the property arrangements clearly address refinancing, payment, transfer of title and what will happen if the bank refuses the loan, helping to avoid a situation in which ‘the home has been allocated to one party, but the other remains on the loan for an extended period’.
If you have obtained a court order but the bank refuses to release your ex-partner from the loan obligations, or the property transfer has remained incomplete, we can also help review the existing documents and applicable deadlines and help you determine whether the next step should be to continue seeking refinancing, adjust the implementation arrangements or consider selling the home.
Disclaimer: This article is for general information only and does not constitute legal or financial advice for any individual circumstances. The appropriate course should be determined by consulting a qualified lawyer and lender in light of the actual circumstances.
