Divorce with mortgage can hide unexpected issues: wanting to split-up but the resale value of your property is below outstanding mortgage?
An all too common problem faced by many separating couples in Spain today is: how to deal with a property should the relationship ends? It is a cruel twist of fate that the emotional turmoil that many suffer at this time is exacerbated by the fact that the resale value of the property is not sufficient to fully repay the mortgage. So, simply opting to sell the property and splitting the proceeds is often not an option.
Divorce with mortgage: what then is the legal position of a couple who find themselves in this position and what options do they have?
Firstly it should be understood that when a couple sign a mortgage agreement each person becomes individually and severally liable for the repayment of the mortgage. The term ‘individually and severally liable’ means that both partners are liable for the entire mortgage. To illustrate the point, in an extreme case, should either die (and in the absence of mortgage protection insurance), the other becomes liable for repayment of the entire mortgage. One-half of the liability to repay the mortgage does not end with the demise of the other mortgagee. While this may seem unfair it is considered a necessity by the banks before lending to a couple.
Legal Options after divorce with mortgage
So, given this illustration of the legal framework, what happens if one of the joint mortgagees is no longer able to – or simply decides that he or she no longer wishes to – contribute to the mortgage repayments?
In fact this problem does arise not infrequently, for example when a relationship breaks-up due to infidelity and one partner leaves the home to begin a relationship with another person. It can be the case that the partner who has left the home is unable or unwilling to continue contributing to a mortgage in a property in which they no longer live.
Whatever the reason for the ending of a relationship there are a number of options available with regard to the continuing liability for repayment of a bank loan on a property in Spain. If there is no possibility of reconciliation, the couple have the following options:
Take on the responsibility for the other’s share of the mortgage
While perhaps the ‘ideal’ solution, this will typically require that partner to ‘subrogate’ the other partner’s half of the mortgage. This will mean that the bank or other financial institution that initially granted the mortgage must agree to this. The bank will carry-out the same analysis as they did at the time that the original mortgage was granted and will be most concerned that the income of the partner wishing to take over the entire mortgage is sufficient to cover the repayments.
Another version of this solution would be to have a third party take over the other half of the mortgage. This could be a friend or relative of the partner staying in the property. However, if the bank refuses to approve the subrogation then the situation becomes similar to where…
One partner assumes responsibility for all repayments
When one of the spouses/partners simply leaves the other partner in the lurch so-to-speak and the party left behind has to assume responsibility for all of the repayments. In this case, the partner making all of the repayments will at least be entitled to an equitable share of the party equivalent to the additional repayments that they make. This does not mean that they own the entire property since the partner who left will still be entitled to a proportion of the equity equal to the contributions that they have made. However, at least the additional mortgage payments made are not ‘lost’ but rather they may be added together and reflected in the ownership of the property.
Should you wish to sell the property, it should be borne in mind that it will be necessary to obtain the approval of the other partner. For this reason, at some point it is necessary to reach a legal agreement with the other partner which may even recognise that partner’s equity in the property.
One partner formally cedes their share in the property and the other takes responsibility for repayment of the entire mortgage
This can be quite common in cases of divorce where the bank refuses the subrogation of the mortgage and in the divorce agreement one partner ‘cedes’ their share to the other. This option is often tempting when the desire remains for a complete and absolute split. However it is not to be recommended since the partner ceding their share of the property will continue to be liable for repayment of the mortgage as far as the bank and, more importantly, as far as the law is concerned. Should the partner who remains in the property default on repayments, the partner who has cedes their interest will still be liable for repayment of the whole mortgage.
Sell the property
Another option is to sell the property to a third party and agree to either split the proceeds or, as is possibly more likely, to agree to continue to be jointly liable for any outstanding balance. Possibly the least attractive option since no-one wants to have to pay a debt with no discernible benefit.
Rent the property to a third party
Depending on the rental values in the area, renting the property to a third party may be an option that covers, or almost covers, the mortgage repayment costs. In this way any financial benefit that may be obtained from the property is equally shared. It may be the case that renting the property for a number of years enables the mortgage to be repaid in full and the property can then be sold and the proceeds shared.
Default for divorce with mortgage
The final option is to default on the mortgage. It is possibly the worst of all options since the bank will charge in full for the entire repossession procedure including legal and auctioneers fees and this will be added to the bill. It may of course be that there is no option if either or both of the spouses/partners do not have a sufficient income to meet the mortgage repayments jointly or separately and are unwilling or unable to agree to any other option. It will often take the bank a not inconsiderable amount of time to arrange the repossession and eviction proceedings where necessary. It should be borne in mind that the financial liability travels with you in this case and can be enforced in other European countries via a European Enforcement Order.
This divorce with mortgage situation outlined above is quite common nowadays and what is clear that the best results are going to be obtained where the spouses/partners are able to maintain a good level of communication and cooperation so as to manage the property asset in a way that minimises any financial loss. What is clear is that those who stick their heads in the sands and avoid discussing the matter with their ex-partners are really only building-up a bigger financial headache at a later date.