Keeping the House Estimator
The family home is generally speaking the most valuable family asset. The family home can continue to be a source of security and stability to the family (and particularly children), during relationship breakdown.
Often, one party (Party One) has a strong desire to remain in the family home, and very often the other party (Party Two) is accepting of this concept (at least in theory).
Whilst this may seem desirable in theory, in reality can Party One afford to service the existing mortgage? and any additional borrowings to fund the settlement with Party Two.
Example:
Dale and Bianca are separating. Their home is valued at $1,200,000 against which they have a $600,000 mortgage.
Bianca wishes to remain in the family home, and wonders whether this is feasible from a financial perspective.
Bianca has a gross salary per annum of $90,000 (or $7,500 per month).
Dale and Bianca have agreed to a 40:60 split of their equity in the property - meaning Dale shall receive ($600,000 x 40%) = $240,000 and Bianca ($600,000 x 60%) = $360,000.
Bianca, to retain the house, would be required to refinance the existing mortgage of $600,000, plus an additional $240,000 settle with Dale. Bianca would be required to borrow $840,000.
There are two major considerations, Loan to Value Ratio and Loan Serviceability.
In Australia, the maximum Loan to Value Ratio (LVR) for most home loans is typically 90%, meaning you'll need a deposit of at least 10% of the property's value. However, some lenders offer higher LVRs, such as 95%, particularly for first home buyers or for construction loans. Lenders Mortgage Insurance (LMI) is often required for LVRs above 80% to mitigate the increased risk to the lender.
Firstly, The loan to value ratio (LVR) in our example is likely acceptable to lenders at 70% without LMI.
As a general guideline, mortgage repayments should ideally be no more than 30% of your gross (pre-tax) income. Some experts suggest that exceeding 28% of gross income on mortgage repayments can indicate potential mortgage stress.
As a ballpark, monthly repayments could range between $4,700 and $5,500 per month, depending on the term and interest rate. Bianca would require between 62.67% and 73.33% of her gross monthly income to service the loan. Given a loan serviceability reference rate of 30%, it is highly unlikely Bianca would satisfy loan serviceability requirements without additional support.
Consideration of whether it is financially viable for one party or another to remain in the family home is a very important aspect of modelling realistic settlement outcomes.
The harsh reality of the Australian housing market, means that it is often difficult for separating couples to continue independently as homeowners.
The average home price in Australia is $1,002,500, with the medium salary of $88,400, and maximum borrowing capacity of $488,021.
Returning to our example, Bianca to continue in the housing market may be limited to an estimated price cap of $850,000 which may be insufficient purchasing power in her preferred location and dwelling.
