Divorce and Joint Mortgage: Everything You Need to Know

People who get married want a home, and to that end, they often take out a joint mortgage. The big problem arises when the love ends and divorce comes into the picture. How can you prepare for a situation like this? What should you do when it happens? Who gets to keep the house? We’ll answer those questions right now!

Who gets the house and the loan?

When there is a joint mortgage and divorce is inevitable, there are three possible scenarios regarding who keeps the home and assumes the mortgage payments: neither party keeps the home; one of the spouses keeps the home; or the spouse who will keep the home buys out the other spouse’s half of the mortgage.
Let's start with the situation in which the house is sold and, as a result, no one ends up owning the property.

-Neither member of the former couple gets to keep the house

For many people, divorce proceedings involving a joint mortgage are the only option, and due to a lack of liquidity to continue making mortgage payments or a failure to reach an agreement, the property is sold.
Any outstanding balance on the mortgage will be paid off using the proceeds from the sale; however, if the proceeds are insufficient, the remaining balance will be split between the former spouses.
However, in order for the loan to be fully paid off, there are procedures that must be followed and a fee that must be paid; nevertheless, this is undoubtedly the most “peaceful,” simple, and neutral way to resolve the issue of what to do with a joint mortgage in the event of a divorce.

– One of the former couple’s members gets to keep the home

When one member of a former couple wishes to keep the property purchased through a joint mortgage, the solution may involve removing that person’s name from the loan.
In practice, the transfer of a mortgage involves transferring the loan from one co-borrower to the other. Whoever remains as the sole borrower will, of course, be responsible for repaying the loan, and the property will be in their name.
However, for this solution to be implemented, it must be proposed and accepted by the creditor bank. This decoupling process may involve a review of the loan and an increase in the spread.
This increase in the spread is linked to the rise in the customer's debt-to-income ratio, which in turn implies a higher risk of default—factors that are all taken into account in the calculation of the spread.
Note: According to Decree-Law No. 74-A/2017, the spread cannot increase when the household of the borrower responsible for the loan has an income that results in a debt-to-income ratio of less than 55% or 60% if there are two or more dependents in the household.

-Purchase of half the mortgage by the person who will keep the house

In addition to the two situations we have described, there is also the possibility that the former spouse who keeps the home could buy out half of the mortgage from the other spouse who will not be keeping the home.
This purchase of half the credit is referred to as a “torna,” and its value must be determined by mutual agreement. As a general rule, the torna is calculated as follows:

• First, the difference between the property's price and the remaining balance on the mortgage is calculated;
• Divide the calculated amount by two.
  In addition to receiving the buyout amount, the person selling their share must take into account any capital gains on which they will have to pay tax when filing their income tax return. If that amount is used to purchase another home for permanent residence, the former spouse who sold their share of the mortgage will be exempt from this payment.

-Search for and compare alternatives

Improving the terms of your mortgage-linked life insurance won’t resolve a divorce, but reducing household expenses can alleviate some of the financial stress families face and has an impact on your relationship, so consider reviewing your insurance terms and looking into alternatives.
The simplest way to explore options for your home life insurance is through an insurance broker who works with multiple insurers. Here at EXS, we work with 26 insurers and have dedicated expert consultants who can provide comparative analyses of the best solutions for your home life insurance.