Refinancing the family home after divorce or separation
Separation can be one of life's most stressful experiences. Alongside the emotional strain, there are often important financial decisions to make, especially when a family home, business interests or outstanding tax debts are involved. This is where integrated wealth and lending advice can provide valuable support and clarity.
Why early finance advice matters
Many people don't realise that a property settlement that looks workable on paper may not always be achievable from a lending perspective. Getting finance advice early can help you understand your options, avoid costly surprises and make more confident decisions during an already difficult time.
The hidden lending challenges after divorce or separation
When a relationship ends, it is common for one person to want to keep the family home. To do this, they may need to refinance an existing mortgage into their sole name and, in some cases, borrow additional funds to pay a settlement to their former partner.
The challenge is that separation can place pressure on many areas of a person's financial life, which may affect their ability to borrow. Any one of these issues can reduce borrowing capacity. Several together can make lending options much more limited:
- Reduced income or business profitability
- Child support obligations
- Outstanding tax debts
- Additional costs that can add financial pressure
- Missed or late repayments appearing on a credit file
Why tax debt can become a major obstacle
Many clients are surprised to learn that outstanding ATO debt can make it harder to apply for finance. Outstanding tax debt can also complicate a finance application. Lenders have different policies for assessing tax liabilities, including circumstances where funds are required to clear an existing tax debt.
That does not mean finance is always out of reach. It often means the lending strategy needs to be carefully structured and the right lender selected.
Your tax returns don't always tell the whole story
This can be especially important for self-employed borrowers. After a separation or a period of business disruption, income may temporarily dip, even if the business has since recovered. This can affect borrowing capacity when older financial statements do not reflect more recent improvement.
Some lenders are willing to consider more recent evidence of trading performance, such as Business Activity Statements (BAS). These can provide a more current view of a business's financial position.
A real-life example
Recently, a separated business owner wanted to keep the family home as part of a property settlement. At first glance, there were several challenges:
- Declining income shown in his tax returns, partly due to the pressures of the separation
- An outstanding ATO debt ($60,000)
- Previous repayment difficulties during the separation period
However, a closer review showed there were also positives. There was sufficient equity in the property, recent Business Activity Statements (BAS) showed improved business performance, and the client's repayment conduct had stabilised over the previous 12 months.
In this client's circumstances, a lender was identified that was willing to consider the client's more recent business performance. Together with a plan to clear the tax debt as part of the broader settlement, the client was able to obtain finance and retain the family home. This example is illustrative only. Lending criteria and individual circumstances vary, and similar outcomes cannot be guaranteed, but it's always worth a conversation with a lending specialist to explore your options.
Our lending team is here to help
If you are going through a separation, carrying tax debt or worried about your ability to refinance, seeking lending advice early can make a meaningful difference.
Understanding what lenders may consider when assessing an application before making important financial decisions can help reduce stress and avoid pursuing an outcome that may not be possible to fund.
If you would like to understand what may be possible for your own personal circumstances, please contact me for a chat.
General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977. Rev Invest Pty Ltd is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977.