How to finance your house after a divorce or death

A common question, if you have co-borrowers, is what happens when one of you passes away (or if it’s your spouse and you get divorced). The answer depends on a wide variety of factors, like whether you’re insured, or how much of the house each borrower owns. Here’s the rundown on what to expect:

Image Credits: Divorce, Stevepb, Pixabay.

What happens if a co-borrower dies?

If your property is an HDB flat (excluding Executive Condominiums), it depends on how you’ve been servicing the loan. If you’ve been paying your property loan through your CPF, you would definitely be under the Home Protection Scheme (HPS). It’s mandatory to buy this if you use your CPF to pay the home loan. If a borrower passes away, HPS immediately kicks in to pay off the remainder of the property loan.

If you don’t have HPS for some reason (e.g. you live in private housing, or didn’t pay through your CPF), then it depends on whether you purchased Mortgage Reducing Term Assurance (MRTA). MRTA is offered by several different insurers, and works the same way as HPS – if a borrower dies, it covers the remainder of the home loan. In case we need to say it, please make sure you buy this if you have a property loan.

Do not be too happy if you inherit a property, you often also inherit the loan.

In a worst case scenario, if there is no insurance payout, the surviving borrowers will have to take on the full loan repayment. The banks will usually try to work with surviving borrowers, to restructure the loan. Common outcomes are allowing free repricing (i.e. switching to a cheaper loan package, from the same bank), or extending the loan tenure (capped at 35 years, maximum).

If your spouse that passed away earns $4,500 a month and he/she is the only breadwinner, then when you take over the property, you also take over the loan. The causes the bank to restructure the loan into 1 name. In order to restructure the loan to one name, the remaining “Owner” i.e. Mortgagor must also be the Borrower. The Borrower must then be able to PASS TDSR. If the borrower cannot pass the TDSR, the loan may be required to be PAID down or reduced. This would be a dire situation and could lead to losing your house. 

If you’re in this situation, the first alternative is to see if anyone else in the family can contribute. If you have a child who’s already working, for instance, you can put their name on the deed, and take them on as a co-borrower (they will, of course, be able to tap their CPF for home loan repayments). As they’re younger than you, this can also lower your Income Weighted Average Age (IWAA), which allows you to stretch your loan tenure further. You could also enlist the help of your wider family (e.g. you in-laws) to do this, and plan to buy over their portion of the house when you’ve settled the loan.

But really, all of this can be avoided if you buy a mortgage insurance MRTA. However if your income alone  can support the outstanding loan, then you should not worry too much as you will pass TDSR and be able to restructure the loan upon death of a spouse.

What happens if your spouse is a co-borrower, and you get divorced?

For HDB flats, you may not be able to retain your flat after a divorce – it has to be disposed of (i.e. sold back to HDB at the prevailing market rates, and the proceeds split between both parties). In these cases, financing is a moot issue – there’s nothing to finance, and you just have to be happy with whatever HDB gives you.  To determine if this will be the case, you need to consider factors such as:

Is the flat a matrimonial asset? It is if it meets the following conditions:

• First, the asset is ordinarily used or enjoyed by both parties or one or more of their children while the parties are living together for shelter or transportation or for household, education, recreational, social or aesthetic purposes;
• Second, the asset has been substantially improved during the marriage by the other party or by both parties to the marriage.

This means that, if the flat was a gift or an inheritance, it may not be a matrimonial asset (and the person who received or inherited it can keep it). However, even a gift or inheritance can be argued to be a matrimonial asset, if it was substantially improved by either or both parties during the marriage.

For example, if you inherited the house from your parents, but both you and your husband put it through a $100,000 renovation, it may count as a matrimonial asset.

Otherwise, the following conditions are considered:

• The marriage was not annulled (If it was annulled, the flat must be disposed of)
• The divorce was due to non-consummation of the marriage (In these cases, the flat is always disposed of)
• The divorcee is raising the children (The divorcee who raises the children can retain the flat. The exception is if the marriage is annulled, in which case the flat must be disposed of)
• The divorcee is eligible under the Single Citizens Scheme (If you qualify, you can just take over the flat, servicing the loan and other costs, as if you had bought it as a single)
• Someone’s parents is listed on the flat application (This gets too complicated to explain here, and HDB will  break this down for you when the time comes; but in general, you can retain the flat if your parents’ names are on the application).

For private property, the court will decide what percentage of the house each side owns, based on the cases presented by your respective lawyers.

Okay, let’s say you can retain the flat, which means having to pay for that loan. Oh joy. What next?

The easiest way is, you and your ex-spouse agree to keep paying the loan even when separated (perhaps for the sake of the children). You  both carry on repayments until the house is fully paid up, at which point you can either (1) sell and split the proceeds accordingly, or (2) buy over your ex’s share of the house. This is applicable to both HDB and private properties.

If you want to buy over your ex’s share of the house, you can use a bank loan to do this. Contact a mortgage broker, like one of our experts at iCompareLoan.com, to comb through the current loan options and find you the cheapest (this is a free service, mortgage specialist are paid to do this by banks).

Otherwise, you’ll have talk to the bank about restructuring the loan. Usually, the bank will try to get you to reprice and extend your loan tenure (although you can never end up with a total loan tenure that exceeds 30 years for HDB and 35 years for Private). As with HDB flats, you can also get another working family member on as a co-borrower.