How is a House Divided in a Divorce and Who Gets the Equity?
Estimated reading time 7 minutes
Divorce is never a pleasant situation to be in. With so much to think about and so many potential issues yet to arise, it can be a tricky time for both parties to successfully navigate. Aside from any implications it may have for any children involved, the next biggest worry is likely to revolve around the family home. In terms of assets, it is more than likely the most valuable one in your ownership and how you proceed with the handling of it during a divorce is extremely important.
Sometimes the distribution of assets and equity may work in your favour, other times it may not, and that is largely determined by your own personal situation as well as the ruling of the court should it go that far. To get a better understanding this blog will illustrate how equity is determined in a divorce.
What does equity mean?
A common question that comes up concerning property relates to equity. It’s surprising yet also understandable that people are often unsure of what it means.
Property equity is the value of your property minus any amount owed on the mortgage. Often confused with the value of the property itself, equity purely relates to how much of that value is owned by the people paying the mortgage.
An example is:
- Your property is worth £250,000
- You have £175,000 left on your mortgage
- Your equity would be £75,000
Over time your equity in the property will increase as you pay more towards your mortgage and slowly take more ownership of it. In addition, as the value increases, your equity increases too as you will still be paying off the same value mortgage.
Sometimes equity release can be considered, and in a divorce, this is sometimes considered if you are looking to keep the property yourself but buy the other person out. By securing this equity release loan, you may be able to use that to pay the other person. The only problem here is that you would still be required to pay that amount back and with interest, that could prove very expensive.
What is equity release?
Equity release is where a lender gives you a sum of cash in return for a share of the proceeds when you sell your house. This can be beneficial at the time when used for home improvements for example, but it can also be detrimental, the sale of your home pays back the amount you borrowed which in turn reduces the value of your estate.
Equity release is only available if you are aged 55 or above, which can also work against those that may require a quick house sale due to a divorce or other life-changing issue.
Unfortunately, you can also find yourself falling into negative equity which makes the handling of a property sale during divorce even more stressful.
What is negative equity?
If the property market is on a downward spiral and you find that the value of your home has dropped. You may owe more on the mortgage than what the property is now worth. This can make a house sale particularly challenging and why those that do fall into negative equity look to cash house buyers to help them stop losing more money.
How much equity is in my home?
Living as a married couple makes understanding how much equity you hold as an individual a little tricky. If for example, you are living by yourself, the equity is all yours. When a partner is involved, you must look at a few factors. You may hold £75,000 equity between the two of you, but does just one name appear on the property deeds? Does one person pay more than the other? Is everything split 50/50? The answers to these questions will help you understand how easy, or difficult, it may be to have a speedy resolution. If there is an even split, as long as you both agree on it, the process may not be too difficult.
By having a property valuation carried out you will be able to get a decent idea of the current valuation and with mortgage statements to hand see what is left to pay you’ll be able to see how much equity you have. Simply remember the equity in your home is the value of the property minus the amount outstanding on your mortgage.
During a divorce though, things aren’t always simple. Disagreements can spring up over a host of issues and delay a sale which could also see – by the time you have resolved the problems – a drop in value which reduces your equity.
How is the house equity worked out in a divorce?
The first thing to do with the property when a divorce is taking place is to, as hard as it seems, talk amicably about the options. In some cases, you may be able to mutually agree on one party buying the other one out, you may agree to sell the house and split everything 50/50 or you could even consider sharing the house.
In many cases though, a clean break is wanted by all involved and this results in the sale of the property and quite frequently, a long-drawn-out affair working out who is owed what.
The equity in the property should be distributed fairly and the amount accurate, so before putting for sale signs up, have a valuation carried out. If you both agree to this valuation, you can move forward with the sale and if you have also agreed that the equity is split 50/50 there should have no problems when the sale is completed.
However, in many cases, there can be disagreements over the valuation. You may be thinking the property is worth £300,000 and see a higher level of equity being split between the two of you. Your former partner may think it is worth £250,000 and whilst delivering less profit, they see that a potentially quicker house sale may allow this chapter in your lives to end sooner.
When such agreements fail to take place, they can be put in the hands of the courts, and it is they who may determine that the only way to progress is to appoint an independent valuer. The valuation given then is final and will be the amount that the house is listed at.
This isn’t necessarily the end of the issues though. Not only will an agreement need to be reached on the splitting of any equity, but the costs accrued via the courts could also prove to be very costly for you both. Further denting the impact your equity may have on both of your bank balances.
Once a valuation has been agreed
With a valuation now agreed on, whether that be due to the courts or something you have done mutually, the split is now the most important issue to resolve.
In many cases a 50/50 split will be agreed upon. However, as we mentioned earlier, factors could lead to this being disputed. Especially if someone has always paid more towards the mortgage for example.
If a dispute does arise over the split, a solicitor will likely need to be appointed who will then work to find a settlement that both parties can agree on.
This can be a further cost to bear and can make the whole process much more stressful than it needs to be. The difficulties don’t stop there though. Should an agreement not be reached via a solicitor, a court order could be issued that will then determine the exact split of equity.
Selling property during a divorce and obtaining the equity you deserve can be difficult, especially if both parties have differing opinions of the true valuation of the house. At Gaffsy we buy any home and can help you resolve your equity concerns by giving you a free cash offer. No costs lost to solicitors, no court fees, just a quick, amicable, and smooth house sale allowing both of you to move on and share the proceeds of your house sale as you see fit. Contact us today to see how fast we can sell your home.