Divorce and mortgage: options, financial impact, and steps

Divorce is one of the most complex situations to manage from a mortgage perspective. The separation triggers major financial decisions regarding the shared property and associated mortgage. This guide presents the available options, their implications, and the steps to take.

Joint and several liability: a crucial point

The first point to understand: when two spouses have signed a mortgage contract, they are jointly and severally liable for the debt. This means the bank can demand full repayment of the mortgage from either spouse, regardless of the divorce judgment.

The divorce decree issued by the court does not automatically modify the mortgage contract. An active approach with the bank is needed to change the loan terms and, if applicable, release one spouse from joint liability.

The three main options

Option 1: Buyout by one spouse

One spouse buys out the other's share and takes over the mortgage in their name alone. This is often the preferred solution when children are involved and stability is desired.

Conditions to meet:

• Individual affordability: The retaining spouse must be able to bear the mortgage charges alone under the standard calculation (theoretical 5% rate, charges max. 33% of gross income)
• Funds for the buyout: Sufficient funds are needed to buy out the ex-spouse's share (property value minus mortgage, divided according to the matrimonial regime)
• Bank approval: The bank must agree to transfer the mortgage and release the other spouse

Worked example:

Property valued at CHF 900,000, remaining mortgage of CHF 650,000. Net equity is CHF 250,000. Under participation in acquisitions with equal contributions, each spouse is entitled to CHF 125,000. The retaining spouse must therefore pay CHF 125,000 to the other and demonstrate sufficient income to carry the mortgage alone (approximately CHF 100,000 gross annual income for this mortgage).

Option 2: Selling the property

Selling is sometimes the only viable option, particularly when neither spouse can take over the mortgage alone or when the division is too complex.

• The sale proceeds first go to repay the mortgage
• The remaining balance is divided between spouses according to the matrimonial regime
• If 2nd pillar (LPP/BVG) funds were used for the purchase, they must be repaid to the pension fund
• Selling costs (brokerage, capital gains tax) are deducted

Be aware of the real estate capital gains tax: if the property has appreciated since purchase, the capital gain is taxable. The rate decreases with the length of ownership (the longer you held it, the lower the rate). This tax can represent a significant amount.

Option 3: Maintaining co-ownership

In some cases, ex-spouses choose to maintain co-ownership temporarily, for example until the children reach majority. This solution has advantages but also risks:

• Advantage: Stability for children, no immediate selling or transfer costs
• Risk: Joint liability maintained, difficulty making joint decisions about the property, deadlock in case of disagreement
• Important: A detailed written agreement is essential (cost sharing, future sale conditions, pre-emption rights)

Impact on affordability

The transition from a dual income to a single income is the main financial obstacle during a divorce. The bank recalculates affordability based solely on the retaining spouse's income.

Elements considered by the bank

• Retaining spouse's income: Salary, bonuses (typically counted at 50-80%), ancillary income
• Alimony received: Some banks partially count it (50-80%)
• Alimony paid: Deducted from available income
• Mortgage charges: Calculated at the theoretical 5% rate on individual income

It is common for the affordability calculation to fail with a single income. In such cases, solutions exist: additional amortization to reduce the mortgage, renegotiation of terms, or in some cases, refinancing with a more flexible institution.

The 2nd pillar and equity in case of divorce

If 2nd pillar (LPP/BVG) capital was used as equity for the purchase, the situation becomes more complex during divorce:

• The withdrawn LPP amount is recorded in the land registry as a disposal restriction
• In case of sale, the LPP capital must be repaid to the pension fund
• The division of occupational pension assets in divorce takes these withdrawals into account
• If one spouse retains the property, they may need to compensate the other for their LPP share

Steps to follow

1. Get the property appraised: Have an independent property valuation done to establish the current market value
2. Analyze the options: Determine whether a buyout is financially viable for either spouse
3. Contact the bank: Inform the institution of the situation and discuss transfer or refinancing options
4. Consult a notary: For the property transfer and tax implications
5. Plan for pension provision: Review your 2nd and 3rd pillar situation after the division
6. Formalize the agreement: Include the fate of the property in the divorce settlement

The role of a mortgage broker

A mortgage broker can be particularly helpful during a divorce:

• Objective assessment of individual affordability
• Finding the best refinancing terms from multiple banks
• Negotiating with the current bank for mortgage transfer
• Advice on the optimal strategy (buyout, sale, amortization)
• Coordination with the notary and lawyers