Going through a separation or divorce is never easy, especially when it comes to dealing with shared assets.
If you and your former partner own a property together, and you had help from your parents in purchasing it or with obtaining a home loan, it can be common for an ex partner to argue that money advanced by their ex-partner’s parents was a gift not a loan, despite any unwritten understanding that existed during the relationship. One reason for claiming this is to avoid having to repay the loan as part of the divorce settlement.
These disagreements over whether monetary support provided by the parents of one partner were a gift or a loan can be difficult to navigate.
We’re here to guide you through the process of separating your assets, and making sure your loans are repaid.
Recovering loans made by parents to adult children if they divorce
Firstly, were the funds a gift or a loan?
The first step is to establish whether the your parents provided to help you purchase your home was received as a gift or a loan. Whether it was a gift or a loan is important in determining the total amount of common property shared by the couple.
In Australia, money provided by parents to their child is legally presumed to be a gift unless otherwise documented.
If it is a gift, there is no obligation to repay it. This is because a gift is considered to be a financial contribution towards the property of the parties, as if the child it was gifted to had made the contribution themselves.
Conversely, if it is a loan, it needs to be repaid out of the separating couple’s assets.
What happens in a family law court
In a family law court, the court may accept the payment the parents made, “the funds”, as a loan that needs to be repaid in full to the parent, and the loan will be included in the property pool as a liability. Liabilities are debts including credit cards and mortgages that arise in a property settlement.
Alternatively, the court may determine the payment was a gift to the child, with the parent having no expectation of repayment. In that case, you treat the gift as if it were your own financial contribution towards the property.
The terms of the loan
Courts usually require evidence of the parents’ expectation of repayment.
The best form of evidence of a loan is a written record of the loan made around the time it was advanced. This is the most likely form of evidence to be accepted in court.
A written agreement made after separation is unlikely to be accepted as evidence of a loan.
Forms of evidence can include:
- a written loan agreement
- bank statements evidencing the payment
- bank statements showing how the payment was used
- repayments of the loan
Bank statements are also useful in showing whether the loan agreement was on a commercial and/or conditional basis, and whether it included a commercial interest rate, repayment schedule, and clauses to call for repayment, or if security was taken for the loan, such as a second registered mortgage encumbering the child’s house, or a record was kept of the loan being repaid in accordance with the loan agreement.
Returning loan from parents after separation: Repayment options prior to court
To avoid legal fees incurred from going to court, the best course of action is to start appropriate negotiations with your ex partner at an early stage of the settlement. If you and your ex can’t decide between yourselves on how to settle the property or loan repayment, you can take the issue to Family Law Court.
Keep in mind that if the matter goes to court, your parents may be called upon to give evidence by Affidavit in your case, and later cross-examined at a trial or arbitration.
How to protect your parents and yourself
To protect your parents and yourself, it is important to document the loan and the terms of the loan.
If you haven’t documented the loan or started repaying the loan before the property settlement, it’s best to speak to a family law expert and get legal advice as soon as possible.
Avoid similar problems in the future
To avoid similar problems in the future when purchasing a property with your partner or spouse, there are some steps you can take to safeguard yourself and your parents:
- establish if your parent’s contribution is a gift or a loan
- draw up a loan agreement when the loan is being advanced
- document the loan in writing
- make ongoing repayments to your parents.
Should I keep paying the mortgage after a separation?
Yes. After a separation, both you and your ex are responsible for continuing to make mortgage payments until the property is sold or refinanced. Be sure to keep up with mortgage payments to avoid defaults, which can negatively affect your credit rating and ability to borrow money in the future.
How do I remove myself from a mortgage after a divorce?
To remove yourself from a mortgage after a divorce, you will need to either sell the property or refinance the mortgage into your ex partner’s name. This process can involve negotiating with your ex to agree on the value of the property and how to divide any equity or debts. Seek legal and financial advice to ensure that the process is fair.
Who pays the mortgage after a separation in Australia?
After separation, both you and your ex partner are responsible for paying the mortgage until the property is sold or refinanced. If one person stops making payments, the other person is still liable for the full amount. If you are facing financial difficulties, seek financial advice and explore options such as refinancing or negotiating a payment plan with your home loan lender.
What is the average split in a divorce settlement in Australia?
There is no set formula for dividing assets in a divorce settlement in Australia. Each case is unique and will be determined based on factors such as the length of the marriage, the financial contributions of each party, and the needs of any children involved. Be sure to seek legal and financial advice to ensure that any settlement is fair and legally binding.