Financial advisors told The Canberra Times that it’s often wise for a woman with children to buy out her husband’s interest in the marital home during a divorce, but only if she can get a conventional mortgage loan.
Where should women with dependent children live after their divorce? Some women want to buy out their husband’s interest in the family home, so the children don’t need to move. Other mothers prefer to rent or to use funds from the divorce settlement to buy a house of their own. Which choice is right for you will depend upon your ability to obtain conventional mortgage financing.
Melbourne financial advisor Steve Endicott told The Canberra Times that purchasing their former husband’s interest in the marital home is a smart choice for women who have sufficient income to make the mortgage payment. Endicott says that too many women, worried about taking on a large debt, commit “the classic divorcee’s property mistake” by purchasing a less expensive house. Anticipated cost savings often turn out to be illusory given the high transfer costs they pay on the purchase of a new home.
According to Endicott, staying in the marital home offers two financial advantages. First, the purchase of a former spouse’s share of a principle residence incurs no stamp tax or transfer costs. That can translate into a savings of tens of thousands of dollars, offsetting much of the benefit of buying a less expensive house.
Second, courts tend to value houses conservatively in a divorce. A divorcing spouse may, therefore, be able to buy out the ex-spouse’s share of the house for less than its market value. A divorced spouse who buys a new home, however, will probably pay its full market value. Buying out an ex-husband’s share of the marital home can, therefore, help a newly-divorced woman get more for less.
Women who choose to rent a home while investing their share of the marital estate are taking a risk. Home values often appreciate at a rate that outpaces investment. If a newly divorced woman invests her money at a 5 percent rate of return, but housing prices increase at 10 percent a year, the woman may soon find that she can’t afford to reenter the housing market.
Financing the buy-out can be worrying, but Endicott says women should do it if they possibly can, even if that means obtaining an interest-only loan. They’ll probably pay less than they would pay to rent and they’ll be investing in an appreciating asset.
Still, it’s wise to get professional advice before making that choice. Nexia Australia financial planning partner Craig Wilford told The Canberra Times that newly-divorced women who can’t find conventional financing should take care to avoid high-interest loans from specialist lenders. Sometimes downsizing to obtain an affordable mortgage with a reasonable interest rate is the right decision to make.