Getting a Divorce and a Mortgage – What You Need to Know
Divorce brings stress, uncertainty, and plenty of paperwork, and that's before anyone starts talking about who keeps the air fryer. If you're navigating a separation and wondering what it means for your mortgage or future property plans, you're not alone. Many Kiwis face this challenge, and while it may feel overwhelming, there is a path forward.
Let's break down the key steps in managing a mortgage during or after a separation, and what you need to know to protect yourself financially during what's already a difficult time.
Understanding Joint Liability (Because It Doesn't Just Go Away)
Here's the uncomfortable truth: when you separate or divorce in New Zealand, nothing automatically changes with your mortgage from a legal perspective. If you both signed the mortgage documents, you're both still equally responsible for the entire loan amount. It doesn't matter who moves out, who earns more, or who's living in the house. Both of you are liable for making sure those payments happen on time.
This joint liability continues until one of three things happens: the property is sold and the mortgage is fully repaid, one partner successfully refinances and buys the other out, or you both agree on an alternative arrangement that your bank accepts. Until then, if one person stops paying their share, the other person is legally obliged to cover the full payment. Not doing so will damage both of your credit scores, potentially incur penalties, and in the worst case, the bank could take action to sell the property.
This is why maintaining some level of communication, difficult as it may be, is genuinely important. If you absolutely can't communicate directly, working through lawyers or a mediator becomes essential. The alternative, sticking your head in the sand and hoping it sorts itself out, almost always makes things worse and more expensive.
Have the Hard Conversations Early (Even When Everything's Fine)
For those still happily coupled, now is actually the time to talk about what would happen if things changed. Nobody wants to think about relationship breakdown when you're excited about buying property together, but clear decisions made upfront can save enormous stress and expense later.
When you purchase property with a partner, document your financial contributions, agree on ownership shares, and discuss what would happen in the event of a split. If one person is contributing more, whether from savings or help from family, get it documented properly. A lawyer can formalise this with a relationship property agreement, sometimes called a "contracting out" agreement or prenup.
These agreements aren't a sign of doubt in your relationship. They're simply good financial hygiene, like having insurance or a will. You hope you never need them, but if you do, you'll be grateful they exist. The agreement must be in writing, and both parties must receive independent legal advice before signing. You can create one at any time, from before you start the relationship through to when you legally separate, though obviously doing it before any conflict arises makes the process far more straightforward.
How the Family Home Gets Divided
In New Zealand, the division of property when marriages, de facto relationships, or civil unions end is governed by the Property (Relationships) Act 1976. The Act defines a de facto relationship as two people aged 18 or older living as a couple, but not married or in a civil union. If there's any question about whether a relationship counts as de facto or when it started, a court can make that determination.
The general rule under the Act is that relationship property must be divided equally (50-50) if the relationship has lasted more than three years, though shorter periods can sometimes qualify. This equal division applies even if only one partner's name is on the title. The house is considered relationship property regardless of whose name appears on the ownership documents.
However, the law does allow for exceptions. In exceptional circumstances, a court can divide property unequally. For example, one partner might be awarded a larger share if their role during the relationship (perhaps as primary caregiver while the other focused on career advancement) means they would be left at a serious economic disadvantage after separation.
Your Options for Resolving the Mortgage
When it comes to the actual mortgage and property, you've got several paths forward. The right choice depends on your individual circumstances, your relationship with your ex-partner, and what's financially feasible.
Selling the property is the most straightforward option. The house goes on the market, sells to a third party, and the proceeds are used to pay off the mortgage. Any remaining equity is then divided between you and your ex-partner according to your settlement agreement. Both of you can then use that money towards deposits on separate properties if you choose to buy again.
This option makes the most sense when neither party wants to stay in the house, when keeping it isn't financially viable for either person individually, or when you need a clean break and don't want ongoing financial ties. The downside is that selling takes time, you'll pay agent fees and legal costs, and you're at the mercy of the property market. If values have dropped since you bought, you might have less equity than you expected, or in the worst cases, you could even be in negative equity.
Buying out your partner is common when one person wants to stay in the family home, particularly when children are involved and stability is a priority. This typically involves applying for a new mortgage in your own name to pay off the joint loan and buy your ex-partner's share of the equity.
However, this option only works if you can afford it on a single income. The bank will assess your borrowing power as an individual, looking at your income, expenses, credit history, and the size of deposit you'll have (your share of the existing equity). If you've been in the house for several years, particularly if you bought before 2021, you'll likely have decent equity to work with. But if you bought at or near the market peak in late 2021, recent house price movements might have eroded your equity, potentially leaving you with less financial flexibility than you'd hoped.
Negotiating an alternative arrangement is also possible. Some separating couples create a Memorandum of Understanding (MOU) or formal settlement agreement that documents how the joint mortgage will be managed temporarily while they work through other aspects of the separation. Perhaps one person continues living in the house and paying the mortgage while the legal and financial details are finalised. Maybe you agree that one person will eventually buy the other out, but you need time to build up equity or wait for market conditions to improve.
These arrangements can provide breathing room, but they also come with risks. You're still both liable for the mortgage during this period, and if the person living in the house doesn't make payments, it affects both of your credit files. Get any temporary arrangement documented properly with legal advice, and understand that your bank might not be entirely comfortable with informal arrangements that leave joint liability in place indefinitely.
The Buyout Process (It's More Involved Than You Think)
If you decide to buy your ex-partner out of the family home, the process is unfortunately more complex than just getting their name removed from the existing mortgage. You'll need to apply for a completely new mortgage and go through a full credit assessment, so your lender can work out your borrowing power as an individual.
There are two main routes for this. You can take over the existing mortgage by refinancing it into your own name, or you can apply for an entirely new mortgage. Your mortgage adviser will help determine which approach suits your circumstances best, though often they end up being quite similar processes.
The purchase price needs to be established, and this is usually based on a registered valuation. This is important: the valuation must be ordered through your bank's approved ordering system. If you obtain a valuation directly from a valuer, the bank is unlikely to accept it, and you'll end up paying for another one. Yes, this is annoying, but it's just how banks operate.
If there's disagreement about the valuation, either party can order a second report. When two valuations differ significantly, it's common to average them out. However, only the valuation with the purchaser's name on it can actually be used for mortgage approval purposes. If there are discrepancies, you'll need to explain them to the bank.
Once a purchase price is agreed upon, it should be recorded in a formal separation agreement, with both parties receiving independent legal advice. This gives the bank confidence in the arrangement and allows the mortgage application to proceed.
Your deposit comes largely from your share of the equity you've built up in the home. Equity is simply what the property is worth, less what you owe on the existing mortgage. As long as you've owned the house for a few years and haven't bought at a market peak, you'll probably be reasonably well positioned.
Depending on your financial situation, you may also have the option of accessing your KiwiSaver to add to your deposit. This is done via something called a "second chance" withdrawal. Applications are made to Kāinga Ora, who will assess your eligibility based on your cash and income situation. Having equity in your existing property is fine, as long as that hasn't translated to cash sitting in the bank. Essentially, they're working out whether you look like a first home buyer, and most divorcing people do.
The frustrating part is that Kāinga Ora won't grant approval until they've seen a signed separation agreement, even though having that approval is often key to negotiating the buyout in the first place. This chicken-and-egg situation can be maddening, but your mortgage adviser can help you navigate it.
There's another wrinkle with KiwiSaver in divorce situations. Under the Property (Relationships) Act, any KiwiSaver contributions and returns you've accumulated during the relationship are typically treated as relationship property. That means, unless you've got a contracting out agreement that says otherwise, your KiwiSaver balance will be subject to equal division between partners. You might end up with more or less than you currently have, depending on how your balances compare.
Your ongoing affordability is the other critical factor. The bank needs to do a deep dive into your financial situation. They'll look at your income, your expenses, your credit history, and any other financial commitments. If you have children, they'll want to know about custody arrangements, child support obligations (whether you're paying or receiving), daycare or after-school care costs, and any reduction in your income due to care responsibilities.
Even if your separation is amicable, banks usually require written documentation of custody arrangements and associated expenses to verify your long-term financial stability. This might feel intrusive, but it's standard practice, and having this information organised will speed up your application.
The whole process can feel overwhelming, especially when you're dealing with the emotional weight of separation. This is why getting a good mortgage adviser involved early makes such a difference. They can walk you through the numbers realistically, help you understand what's achievable, and handle the paperwork while you focus on everything else you're dealing with.
When Equal Doesn't Mean Fair (And Why That Might Be Okay)
Here's a scenario that comes up more often than you might think: one partner earns significantly more than the other. Under the Property (Relationships) Act, the default is a 50-50 split of relationship property. But in practice, a truly equal split of money doesn't always give both parties an equal opportunity to rebuild their lives.
If you had a property sharing agreement in place when you bought, that should be your first reference point. But if you didn't, and you're negotiating from scratch, it's worth thinking about what "fair" actually means in your situation.
Usually, though not always, the fairest outcome involves the partner with lower income getting a larger share of the equity. Why? Because they're in a weaker position to borrow and afford a mortgage on their own. The higher-earning partner agrees to take less equity because their income gives them greater borrowing power and ability to service a mortgage.
It can be genuinely difficult for the higher earner to accept that a fair split doesn't always mean 50-50. But divorce is expensive, emotional, and draining at the best of times. If both parties can be reasonable, focus on giving each other the best chance of getting back on their feet, and let go of the desire to "win" or get one over on the other person, you'll almost always get much better outcomes. That includes saving a lot of money on legal fees and stress.
Let me give you a hypothetical example. Say a couple has two children and they've agreed the kids should stay in the family home to avoid disrupting school and friendships. One parent takes primary custody, which means they'll have higher fixed expenses and will likely work reduced hours to care for the kids. Their income is lower as a result, which reduces their borrowing power. They do receive child and spousal support from their ex-partner though, which counts towards their income alongside their salary.
For the other parent, even though they earn more and have fewer day-to-day expenses, the cost of child and spousal support is a substantial financial commitment that reduces their borrowing power too.
The best outcome here might be a 60-40 split, where the higher earner leaves more money in the house. This reduces the amount their ex has to borrow to buy them out, making the mortgage affordable and allowing them (and the kids) to stay put. In return, they might agree on lower child and spousal support payments, which means the higher earner has lower ongoing commitments and can borrow more to get into a home of their own. Everyone wins.
There are other creative arrangements that can work too. The higher earner might agree to leave more equity in the home for a certain period via a deed of debt, set at no interest or very low interest, which gets repaid in a few years when circumstances change, perhaps when the kids leave school. Another option is a shared equity agreement, where the higher earner is taken off the title but agrees to leave a certain amount of equity in the property as a percentage of its value. In return, they receive that percentage of any capital growth when the property is eventually sold or when their ex-partner buys them out down the line.
These arrangements require trust and legal documentation, but they can provide solutions when a straight 50-50 split would leave one party genuinely unable to house themselves or their children adequately.
What About Tax?
In most cases, property transfers made under a relationship property agreement are exempt from tax. The transaction is seen as a division of existing assets rather than a sale, so there's no income tax liability triggered.
However, there are scenarios where tax does become an issue. If the property is transferred into a trust, or if it's turned into a rental or holiday home after the transfer, the bright-line test or other tax rules may apply. The bright-line test currently applies to residential properties sold within two years of purchase, and if your transfer or subsequent sale falls within that timeframe, you could face income tax on any profit.
It's genuinely important to get early advice from both a lawyer and an accountant to understand whether you'll have any tax liabilities and to ensure your mortgage and settlement covers all related costs. Finding out about an unexpected tax bill after everything's finalised is not a fun surprise.
Buying a New Home During Your Separation
Yes, you absolutely can get mortgage pre-approval during a separation, but there are some added layers of complexity. You'll still need to prove the usual things: your income, your deposit or equity, and your ongoing expenses. But the bank will also typically require a signed separation agreement, evidence of how assets are being divided (such as the pending sale of the family home or a buyout arrangement), and confirmation of childcare arrangements and associated costs.
Pre-approval can be based on equity you expect to receive from a property settlement, but the bank won't finalise lending until the settlement is actually complete and the funds are available. This means timing matters. If you're hoping to buy a new place quickly, you need to have your separation agreement sorted and ideally have the existing property sale or buyout well underway.
Your mortgage adviser can help you understand realistic timeframes and what documentation you'll need to gather. Starting this process early, even while other aspects of your separation are still being negotiated, means you'll be ready to move quickly when you find a property you want.
The Settlement Agreement (Why It's Not Optional)
To protect both parties properly, you absolutely need a settlement agreement. This is a legally binding document that outlines how assets and liabilities will be divided, clearly setting out each person's rights and responsibilities.
A well-prepared settlement agreement clarifies your financial situation, reduces the risk of future disputes, and ensures both parties genuinely understand and agree on how property and debts are being split. For the agreement to be legally binding, it must be in writing, signed by both parties, and witnessed by independent lawyers. Each person must receive their own independent legal advice before signing.
Yes, this costs money. But it costs far less than the alternative, which is ongoing disputes, uncertainty, and potentially ending up in court. Your settlement agreement becomes the roadmap for unwinding your shared financial life, and having it in place will make everything from mortgage applications to tax compliance significantly easier.
Insurance and Other Financial Loose Ends
One thing that often gets overlooked during separation is insurance. If you have life insurance, check who the policy owner is. It's common to have your spouse or partner as the policy owner, which makes claims easier when you pass away. But control over the policy often rests with the policy owner, not the person insured, which can leave you unable to make changes to your own life insurance if your relationship ends.
Review all insurance policies, bank accounts, and other financial arrangements. If you have joint bank accounts, your bank will typically freeze them once they're notified of a dispute to protect the funds until you reach an agreement or obtain a court order. You'll want to set up separate accounts that you can operate independently in the meantime. Deposits into frozen accounts can continue, but you won't be able to access those funds, even if they're intended solely for you (like your wages or salary). Arrange for income to be paid into an account in your sole name.
For joint loans beyond your mortgage, remember that both parties continue to be liable for the full loan amount until it's repaid or refinanced. A bank isn't required to release either party from a loan until all lending has been cleared. If you're keeping a jointly financed vehicle or other asset, you'll typically need to take out new lending in your sole name to repay the joint loan.
Speak to a Mortgage Adviser Early
Divorce and separation are emotional and exhausting, but getting early advice from a mortgage adviser can help you avoid costly mistakes. Rather than relying on hearsay, guesswork, or what worked for your friend's cousin, speak to someone who does this professionally and can map out your options clearly.
The sooner you get advice, the better. Don't wait until everything's already cut and dried through your lawyer. You'll still need legal advice, of course, but starting with a mortgage adviser in the very early stages, when you're still deciding who gets what and who stays where, means you can run the numbers realistically. You'll understand what you can afford as an individual and what your actual options are.
If you're considering buying out the family home, an adviser can provide guidance on how to structure that purchase. If you're planning to buy elsewhere, they'll help you understand property values, locations, and what you can realistically afford. As long as you're on speaking terms with your ex-partner, coming in together can be helpful, but advisers can work with you individually if needed.
A good mortgage adviser will help you understand the pros and cons of your options, prepare the right documentation, coordinate with your lawyer and accountant, and generally make sure you're making informed decisions rather than reacting emotionally or guessing at what might work.
For additional support beyond mortgage advice, Sorted.org.nz has excellent financial resources specifically for people going through separation. They offer budgeting tools, guides to understanding your legal position, and practical advice on managing money during and after divorce.
The Bottom Line
Managing a mortgage during divorce or separation is complicated, but it's absolutely manageable with the right support and information. Remember that both parties remain legally responsible for the joint mortgage until it's refinanced or repaid, that settlement agreements are essential for protecting everyone involved, and that there are multiple pathways forward depending on your circumstances.
Whether you're selling, buying out your ex-partner, or negotiating temporary arrangements, the key is to get proper advice early, communicate as best you can (even if that's through lawyers), and focus on finding solutions that give both of you the best possible chance to move forward.
Nobody plans for their relationship to end when they buy property together, but when it does happen, approaching the financial side methodically and with good advice will make an already difficult situation significantly easier to navigate.
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