Separation and the mortgage

The bank rang on a Friday afternoon, three weeks in. Routine call, the operator said, just confirming the variable rate change. I was sitting in the kitchen with a cold coffee, looking at a stack of unopened letters with the Westpac logo on them, and I realised I had not thought about the mortgage once since she said the words. The mortgage had been thinking about itself. It does that.

The bank does not know you are separated. The mortgage does not care. Direct debit on the 14th, every month, regardless.

This piece is about what to do, and more importantly what NOT to do, with the home loan in the first six months of a separation. It is Australian-specific, because the mortgage products here (variable rates, redraw, offset, mortgage broker culture) are not the same as the US or UK setups. If you are reading from elsewhere, the principles transfer but the mechanics will not.

I am not a financial planner. This is field notes from someone who got some of this right, some of it wrong, and learnt the difference at his own expense.

Joint and several: the phrase that matters

If you took the mortgage out together, you are almost certainly on it as joint borrowers. In Australia that means joint and several liability, which is a phrase worth understanding properly because it controls everything else.

Joint means the debt is shared. Several means each of you is independently liable for the whole amount. The bank can come after either of you for 100% of the balance if the other walks away. There is no 50/50 in the bank's eyes. There is only "both of you owe all of it, and we will collect from whoever still has money."

What this means in practice:

• One name on a missed payment hurts both credit files. Your credit report and hers move together until the loan is split or paid out.
• "She said she'd pay it" is not a defence. The bank does not care about your kitchen-table agreement. If she stops paying, your credit suffers and your liability is unchanged.
• You cannot force the other person off the loan. Removing a borrower requires the bank's consent, which usually means a refinance, which usually means proving the remaining borrower can service the loan alone.
• Selling does not always release you. If the sale price is less than the balance, you are both still on the hook for the shortfall.

Most of the bad outcomes I have seen in friends' separations trace back to one of them not understanding this. They assume the loan is somehow neutral while everything else gets sorted. It is not neutral. It is a live wire running through the middle of the negotiation.

Week one: do almost nothing

Here is the thing nobody told me. The single best move in the first week is to keep paying the mortgage exactly as you have been paying it.

Not because that is the long-term answer. It is not. But because every alternative you can take in week one is worse than the small cost of one or two months of the status quo.

Specifically, in the first month, do not:

• Stop the direct debit. Even if you feel the funds are unfairly drawn from one side, stopping the payment damages both credit files and gives the other person a legitimate grievance to take to a lawyer.
• Drain the redraw or offset. This looks like a clever move and it is, but it is the kind of clever that costs you 30% of your settlement. Family Court has a long memory for "asset wastage" in the months after separation.
• Refinance into one name. You cannot do this without the other party's consent anyway, and trying creates a paper trail of bad faith.
• Take out a new loan against the equity. Same problem, larger number.
• Tell the bank you are separating. Not yet. The bank will mark the file in ways that limit your future options. Talk to a broker first. (More on this below.)

The mortgage in month one is a holding pattern, not a strategy. Hold the pattern.

What you can usefully do in month one

Quiet, careful, reversible things. None of them require her signature, none of them touch the loan structure.

• Pull the loan documents. Find the original facility agreement, the most recent statement, the offset/redraw balances. If you can't find them, log into internet banking and download the last 12 months of statements as PDFs. Save them somewhere she does not have access to (a personal email, not the family Dropbox).
• Calculate the actual monthly cost. Not just the repayment. Repayment plus rates plus insurance plus body corporate plus utilities. The full carrying cost of the house, monthly. You will need this number for every conversation that follows.
• Map the equity. Current valuation (use Domain or realestate.com.au estimates as a starting point, then a free desktop val from a broker if you want better) minus current loan balance. That number, give or take 5%, is what you are dividing.
• Find out who is on the title. Usually the same as the loan, but not always. Title is held by Land Services in your state and you can order a title search for about $30. Worth knowing for certain rather than assuming.
• Book a 30-minute call with a mortgage broker. Not your bank. A broker. Specifically one who has done separation cases before. Ask the question: "If I had to take this loan into my name only, what would I need to demonstrate?" That answer shapes every subsequent decision.

The broker conversation is the most underrated move in the first month. Brokers see this every week. They will tell you, in five minutes, whether keeping the house is plausible on your income alone, whether refinancing is realistic at current rates, and what borrowing capacity you have for a separate property if it comes to that. Banks will not tell you any of this honestly because banks sell their own product. Brokers, the good ones, will.

Redraw and offset: the difference matters

This is the bit where most people lose money quietly.

Redraw and offset look similar. They are not the same thing in a separation.

Redraw is a feature of the loan. Money you have paid in advance can be pulled back out. Crucially, the funds in redraw are technically the bank's, not yours, until you redraw them. Once you redraw, they become a new drawdown of the loan, which increases the balance. In a separation, redrawing a large lump sum without consent looks bad and often is bad.

Offset is a separate bank account that reduces the interest you pay. The funds in an offset account are yours, sitting in your name (or joint names), and you can move them like any other deposit. Moving money out of an offset does not change the loan balance, but it does increase the interest you pay from that day forward.

Two rules.

• Do not redraw in the first six months unless your lawyer has told you in writing that it is fine. The Family Court treats large redraws around the time of separation with deep suspicion, and rightly.
• Offset moves are visible and reversible, but still need to be explainable. Splitting an offset balance 50/50 by mutual agreement, documented in an email, is generally fine. Quietly moving the lot to a new account in your name is not.

The general principle is that any movement of money between separation and final settlement needs to look reasonable to a neutral third party reading the bank statements two years later. If you would not want to explain it to a registrar, do not do it.

Refinance: when, not whether

If one of you is keeping the house, at some point the loan needs to come into one name. That is a refinance. The question is when.

Too early and you commit to numbers (valuation, your income, rates) that may not be the right ones. Too late and you accumulate months of joint liability and joint credit risk.

Reasonable triggers for actually starting the refinance:

• You have a settlement agreement, even a rough one, that names who is keeping the house and at what equity split.
• Your borrowing capacity has been verified by a broker against current rates and current income, including any spousal maintenance flowing in or out.
• You have at least three months of payslips reflecting your post-separation financial reality (single income, child support, new rent if renting elsewhere).
• The valuation has been done recently enough that the bank will accept it.

Without those four, you are refinancing on hope. The risk is you commit to a loan you cannot service if rates move 50 basis points the wrong way, or if her contribution to the kids' costs ends up different from what you assumed.

A good broker will tell you to wait, sometimes for months, even though waiting costs them nothing in commission. That is the broker you want.

A practical close

The mortgage is the largest single item in most Australian separations. It is also the one most likely to be mishandled in the first thirty days, because the impulse to act is strong and the consequences of acting wrongly are slow to surface.

Do less. Document everything. Talk to a broker before you talk to the bank. Keep paying. Wait for the picture to clear before you sign anything new.

Hold the line. Read the statements. Then move.