"Couples should plan in advance what to do with their house in case they separate."
Around 40% of all marriages in Switzerland end in divorce. Shared residential property makes a separation even more complicated. In this interview, Martine Gabathuler, Head of the Mortgage Center for Region Suisse Romande at Credit Suisse, talks about the consequences of divorce on a mortgage and what happens to an owner-occupied home following a separation.
Ms. Gabathuler, couples who are buying a house together rarely think about the possibility that they might separate. Why should they nonetheless discuss the issue before they purchase real estate?
Martine Gabathuler:* Separation is always a highly emotional burden. It can be extremely difficult to make rational decisions at times like that. Ideally, couples should starting thinking well in advance about what to do with their home if they split up. That is because the financial consequences of a separation are far-reaching, and they can have a major impact on the individuals' future opportunities and plans. In many cases, the mortgage is granted on the basis of the income earned by both partners. If either of the two parties wishes to keep the property after the separation, the financing may become a challenge.
What effect does the form of ownership have on financing the mortgage following divorce?
In most cases, couples purchase real estate in the form of joint ownership, with each one owning 50%. There may also be completely different arrangements – for example, with one partner being the sole owner. However, the form of ownership has no direct effect on the financing of the mortgage. From the bank's perspective, both partners are jointly and severally liable for the full mortgage regardless of the form of ownership. That rule continues to apply even after a separation.
What happens to the existing mortgage in the event of separation?
There are mainly three different options. The first is to leave things as they are. Both ex-partners remain joint owners and joint debtors, even if only one party continues to live in the home. The second option is for the mortgage to be transferred to one party. If one of the two ex-partners is able to afford the mortgage interest alone, he or she can take over the entire loan. That will require a new credit decision by the bank, just like the process of taking out a new mortgage. The decision will be made on the basis of a technical interest rate of 5%. If the decision is positive, nothing will stand in the way of transferring the mortgage. In that scenario, one party assumes complete ownership of the property and pays off the other party.
And the third option?
The third option is that neither of the two ex-partners can afford to finance the property alone, making a sale of the home unavoidable. That means terminating the mortgage early. However, that can get expensive because it generally involves a punitive fee known as an early repayment penalty, which can be up to several tens of thousands of Swiss francs.
Early termination of a mortgage can cost several tens of thousands of Swiss francs.
Martine Gabathuler, Head of the Credit Suisse Mortgage Center for Region Suisse Romande
What does the amount of the early repayment penalty for a mortgage depend on?
It is calculated on the basis of the remaining term of the mortgage. The more time left until the end of the term, the higher the penalty. Long-term loans offering interest rate advantages therefore also come with bigger risks in the event of a separation. n.
Are there ways to avoid selling the home, even if neither ex-partner cannot afford the financing alone?
If leaving things as they are is not an option, there certainly are alternatives to selling. The mortgage debt can be reduced through an extraordinary repayment, for example by receiving an advancement on an inheritance or a loan from one's parents. That might enable one of the two parties to finance the mortgage themselves. Bringing in a new joint debtor can also be an option for securing the financing, provided the bank agrees.
If all else fails, the only remaining option is to sell the property and divide up the proceeds proportionally. In this case, individuals need to keep in mind that advance withdrawals from pension funds used to buy a home have to be paid back when the house is sold. This also applies when one party assumes the share owned by the ex-partner. The best possible solution for all parties involved therefore depends on many factors and is always dependent upon the individual circumstances. That is why homeowners should definitely consult an expert in that situation.
In conclusion, what are your three most important tips for homebuyers to avoid unpleasant surprises in the event of separation?
As a rule, couples should think early about what to do with their real estate if they separate, and discuss their plans with their lender. That is because the lender will have to agree to any changes in the contract. What often happens is that homeowners come to an arrangement on their own, but their bank does not accept it because financing is no longer secured. Moreover, we also recommend splitting the mortgage into tranches with different terms instead of locking in the entire loan for a lengthy period. That allows couples to retain financial flexibility and reduces the penalty they will have to pay if they terminate the mortgage before the end of its term.
My second tip for them is to put important points in writing and review them regularly. This includes, for example, how much equity was provided by each of them at the time of purchase as well as the payments made during the period of joint ownership. Everything should be stipulated in writing, especially for unmarried couples. Otherwise, things can get complicated in the event of separation. Last but not least, couples should contact their bank as soon as possible if there are signs of an impending separation. That way, they can discuss the various options and make the best decisions under these difficult circumstances.