In a divorce proceeding, the parties have several ways to resolve both the liability on the credit and the ownership of the associated property.
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Author: Redaction
Divorce is undoubtedly a very important decision in the life of a couple and, in this sense, in addition to all the family and social aspects, all issues regarding housing must be taken into account, as well as the responsibilities arising from a mortgage which may be associated.
Although there has been a decrease in the number of divorces (and marriages), as the chart below indicates, the financial system, the real estate market and the legal framework in Portugal are already equipped with a set of tools and solutions that may allow a divorce process, in a context of a mortgage, to be carried out with some speed.
1. Confirm owners, borrowers and purpose of house loan
Typically, the couple are co-owners and co-borrowers (in plain language, co-debtors) in the same percentage, respectively, of the property and the associated mortgage. It is also common for banks to require that the instalments be paid into a joint account, so it is this more normal scenario that we consider in this piece
Finally, also in most cases, the property given as a guarantee in the credit contract is for permanent residence (where the couple and the children live) or, to a lesser extent, for a secondary residence (a holiday home for example).
2. Appraisal of the property and value of the debt
For this purpose, the couple should contact a real estate mediator with whom they both agree or, if they prefer, a real estate mediator for each one of the parties and, thus, obtain two reference values (and an average) for the house, which, in some way, may free the couple from any more emotional valuation that each one of them may naturally attribute to the house.
With a notion of the market value of the property, the couple should compare it with the amount owed on the mortgage, that is, with the amount of capital that is still to be amortized (outstanding capital), thus obtaining the so-called LTV (Loan-to-value = amount owed / property value). The solution to be implemented will be quicker and easier the lower this indicator is. In other words, if it is 30%, it means that if the property is worth £100,000 and if the couple sells it for this amount (to a third party or to one of the spouses), they will be able to totally amortise the debt (£30,000) and still have £70,000 left over.
It is at this stage that the couple should make a first decision as to the strategy to be implemented, and should also seek the advice of the mediators in order to start identifying properties for purchase or rental.
3. Contacting and informing the bank
Once these preliminary steps have been taken, the couple must then inform the bank of their decision, whether or not it has been formally formalised. At the same time, you can and should have some alternatives in mind regarding other potential lenders, be it another bank where you are already a client(s) or a credit intermediary.
4. Sale of the house on the market and amortization of the loan
In this case, the couple chooses to put the house on the market and sell it to a third party. If there is a mortgage to be paid, the surplus product of the sale (and consequent taxation, i.e. payment of eventual capital gains) is divided between the two members of the couple according to their percentage of ownership. In order to calculate the capital gains, the commission paid by the estate agent is deducted from the value of the capital gains.
5. Sale to one of the spouses and mortgage credit release
One of the spouses may also choose to sell his/her share of ownership in the property to the other spouse and consequently release him/herself from his/her share of the credit liability. At this point, the following should be considered:
- At the outset, it is important to ascertain the return, i.e. the amount that one of the spouses will have to pay to the other to keep his or her share. In simple terms, the value of the cash payment is equal to the transferor's share of the (market) value of the property, minus the share of the credit liability of the vendor/buyer;
- LTV (value in debt/value of the property) is the same, but now there may be the aggravating factor that only one of the spouses will pay the remainder of the loan;
- However, according to the law, the creditor bank cannot increase the contracted spread as long as the effort rate of the spouse that stays with the property is inferior to 55% or 60% if he/she has two or more dependents
- The creditor bank, however, may require additional guarantees (other property, savings) or the extension of the contract term;
- In case of agreement between the parties and acceptance of the request by the banking entity, an addendum to the contract will be signed by all parties involved (guarantors included, if any), certifying that the house is now owned by only one of the spouses;
6. Sale to one of the spouses and new credit agreement
If there is an agreement as to the return and the creditor bank does not accept the release of one of the debtors, the acquiring spouse may contract a new financing with another institution which will have the property as a guarantee and whose financed amount will have to be sufficient to amortize the totality of the ceasing credit and, if necessary, pay the return to the spouse who sells.
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