One of the saddest repercussions of the slowdown in the economy which has led to the need for the lowering of interest rates, is the amount of relationship break-ups that we have witnessed. While there may be many reasons for the ending of these marriages and De facto relationships, it can’t be ignored that one of the toughest challenges for couples to have to work through is a situation where finances (Or a lack of them) become an issue. If you have to work off a reduced income when the family expenses are still at the same higher level, it can be a hard thing to deal with. The latest figures available from Statistics New Zealand state that 1 in 3 marriages are ending in divorce, with 8,171 married and 63 civil union couples being granted divorces in 2014. Given the fact that people are marrying later now, added to the Kiwi love of home ownership, the separations often involve the division of a home amongst the property to be split.
If the couple has been in a relationship for 3 years or more (This includes living together prior to marriage) then the Relationship Property Act, which was established to recognise the equal contribution of partners to a relationship, states that any property brought into the relationship should be divided 50/50. (This is regardless of whoever paid for the assets). Unless you have the property held in a Trust or have signed a pre-nuptial agreement then the home will probably be the largest asset to be divided.
The decision may be made to sell the house, and if that is the case any funds remaining after the payment of associated professional expenses (less the cost to repay any mortgage or debt securitised by the home) can be distributed evenly amongst both parties. However, often one party wishes to retain the home. This can sometimes be the case when there are children involved in the separation and the decision is made in order to avoid additional upheaval in their lives. But it can also be that one party has formed more of an attachment to the home. If the desire to retain the property is the case, the person wishing to keep the property will be required to “pay-out” their partners share of the value of the home.
The value ascribed to the property will be determined by the ordering of a Registered Valuation to find the property’s current market value. Any debt held against the property is subtracted and the remaining figure or Equity is the amount that needs to be halved as part of the PRA agreement. This is the “pay-out” part, but it should be remembered that there is also any existing home loan existing under both parties’ names which will need to be repaid and registered solely against the new owner. Consequently, the size of home loan that was against the house originally may often have to be increased to accommodate the costs of settlement. It is therefore; very important to find out whether the ownership of this now higher loan is possible when there is only one person left to service the debt.
A loan which may have been originally approved based on two people’s incomes, may not fit the lenders servicing calculators when reduced to one person being responsible for the debt, as monthly living expenses between one or two adults vary very little. Although one of the providers of repayment funds is no longer available it pays to check whether, due to your changed circumstances, you may now be entitled to additional income which you previously may not have qualified for. This can take the form of Family Tax Credit, accommodation supplements and even child support payments, although these are often not able to be used as a source of income for loan servicing purposes. (This will be something to do with feeding and clothing the children being quite important!)
Your solicitor will be able to guide you on most of the requirements regarding the smooth settling of the division of property, but it is also vitally important that you obtain independent advice regarding all of your financial affairs. Not only with the right structure of the borrowing for you to maintain your property without it crippling you financially, but also to cover your Insurance requirements which may have previously been owned by your ex partner. Many people often forget that when they took out their Insurance due to the change of their personal situation (i.e. entering into the relationship), that it was done with a partner as a joint policy owner. When that relationship has come to an end (as with any change of personal circumstances), it should be time to get your Insurance needs reviewed as well. Your registered financial adviser will be able to help you find the best solution at a difficult time, so that you can move forward in the knowledge that your home finance arrangements are sorted.
