How does the discharge of joint and several liability in a mortgage work

How does the discharge of joint and several liability in a mortgage work

How does the discharge of joint and several liability in a mortgage work

Have you split up and your ex needs to be struck out of the mortgage deed? Or do you wish to be struck out of the mortgage deed yourself. If so, you are dealing with ‘discharge of joint and several liability’.

This is a legal term, we will not bother you with that for too long. Just contact us via e-mail, phone or chat. Then we will be happy to explain what we need to ‘cheat’ this for you.

A description of the process

Discharge of joint and several liability, how exactly does it work? If you own a house together with a joint mortgage and you separate, there may be a discharge of joint and several liability. This situation occurs in a divorce or relationship breakdown where either of you wishes to take over the home with a mortgage.

While it sounds easy to remove one party from the mortgage deed, this is a laborious process. In some cases, completely taking out a new mortgage is easier and quicker to arrange. It sometimes happens that proceedings to discharge joint and several liability take months. Proper and complete preparation can significantly speed up the turnaround time.

How to properly prepare for this process yourself is covered in the article. In this article, we will assume the most common situation and that is that someone owns the house on a fifty-fifty basis.

Mortgage affordability

This is because the bank or lender will assess whether the surviving partner has sufficient income to bear the burden of the mortgage. This is because you are jointly ‘jointly and severally liable’ for paying the monthly mortgage charges. After the discharge of joint and several liability, the bank only has the surviving partner to recover the claim if the monthly payments are not made.

 

Turnaround time for the procedure for joint and several mortgage discharge

On average, a process can be settled within 4 to 10 weeks. This depends in part on the following factors :

  • Are the agreements between you and your ex-partner laid down clearly and bindingly;
  • Is the notary flexible in cooperating, when comparing notary quotes, also ask about the processing time;
  • Which lender are you dealing with? Is this a Dutch lender with its own service organisation or a so-called shadow bank working with external service providers. The latter variant causes a lot of delay;
  • Does the house still need to be appraised or is there an agreement in advance on the value of the joint home.

 

Can I also refinance my mortgage?

Actually, there are two options to get the mortgage in one name. The first option is to get the ex-partner discharged from the mortgage deed. So we call this the procedure for discharge from joint and several liability.

The other solution to get the mortgage in your name is to transfer the mortgage to another lender. This will also give you the opportunity to improve your interest rate contract. If you have now agreed on a 4% mortgage interest rate and you wish to transfer the mortgage to the current lower market rate of, say, 2%, you will also immediately save on your monthly expenses.

If you would like more information on refinancing your mortgage, you can read more on this topic in this article.

 

Procedure for dismissing joint and several liability

As soon as you or the departing partner intend to take over the house and mortgage, we can assist you. Often even in the phase preceding this decision.

We follow the next steps in the joint and several liability discharge procedure:

  • Inventory of your wishes and information on already running financial products;
  • Feasibility and savings analysis on taking over a mortgage or taking out a completely new mortgage;
  • Feedback of this outcome through an advisory meeting;
  • After this we make agreements on the execution of the possible advisory assignment. This is tailor-made and, depending on your choices, we agree on a fixed rate.

You know in advance what the costs will be and if it turns out that it is not possible to close or take over the mortgage, you do not incur any advisory costs. We work on a no cure no pay basis.

How can I prepare for the joint and several liability discharge proceedings?

This checklist will help you gather documents needed to properly go into the introductory meeting with a mortgage broker or financial planner. The more information there is, the more concrete the information can become during the meeting.

Tax authority points of interest

In addition to the points that are important to you during the divorce, the Tax Administration also has ‘wishes’. These wishes are based on legislation, but also on practical experience by the inspectors. The Tax Administration has included the tax points of interest in a handy overview. With this information, you can also prepare for the tax return after your divorce.

Filing tax returns separately or together

At the time of your divorce, you have a period of overlap and still have to deal with each other. For example, because there are joint deductions. The Belastingdienst makes the following recommendations about filing returns in the divorce year :

Fewer mistakes are made when filing a joint tax return;
You can record the division of free deductions in the divorce covenant;
Agreements on the result of the tax return are also better to lay down, who receives or pays the amounts as a result of the return.

Partner alimony

The Belastingdienst mainly looks at the actual partner alimony paid rather than the agreed amounts. Therefore, you may only deduct the partner alimony that you have actually paid to your ex-partner. Moreover, the amounts you settled also count.

If you receive spousal support, you should also declare the amounts you could collect and also the amounts you have offset.

Gift tax and divorce agreement

If there is over-parenting and this amount is remitted, then there may be gift tax. In such a situation, the Tax Administration advises to take this into account in the divorce covenant to avoid surprises.

Rent allowance and mortgage

It sometimes happens that someone applies for rent allowance and still has a house with a mortgage on his or her take. Even then, the Tax Administration is authorised to refuse your application for rent allowance. This can be an additional reason to be quickly discharged from the mortgage and ownership of the home.

The reason the Belastingdienst checks whether you still own a home is related to any assets attached to this home and mortgage.

Valuation of the joint home

The first step in the process is to determine the value of the home and any linked repayment products. If you arrange the divorce together and are on good terms, you may arrive at a value of the home together. You can base this on sales prices of houses in your street or neighbourhood or even on the WOZ value. In the end, what matters is whether you can determine a realistic value.

This is where opposing interests often arise. After all, the partner leaving the house has an interest in the highest possible value and the partner staying behind often wants to pay the most favourable price as ‘buyer’. It sometimes happens that you cannot work this out together and wish to hire an expert. Some cohabitation agreements already include agreements on this so you can include these agreements.

You can decide to jointly appoint one appraiser or ask several brokers or appraisers for a valuation and take the average outcome of these valuations as a starting point. It is often wise to have a valuation report done. Most lenders still wish to have an insight into the value of your property at the time of assessing the mortgage application.

Sample deed of partition

Once you have jointly determined the price for the amount to be bought, you should record these agreements in a deed of partition. After all, the remaining partner still has to buy the other half of the property.

Clients often ask us why a deed of partition is still necessary when a divorce agreement is already in place. In the divorce covenant, you also make other arrangements around your divorce and assets and express the intention of who will take over the property. This does not mean that the transfer of the property is a fact; only a notary can arrange this. The divorce covenant will also be reviewed by the court, creating this document earlier in the process. The deed of partition only sees to the formal transfer of the part of the property to be bought. In short, a divorce covenant is not equal to a deed of partition and both documents are necessary.

Incidentally, a divorce covenant is only applicable in the event of a divorce and not in the event of a relationship break-up if you bought the property as cohabitants.

Below is an example of a deed of partition. You can read that it is a legal document regulating the agreements on the end of your relationship and the takeover of the house with mortgage. The notary confirms this document after approval by the lender:

Deed of partition online notary

As mentioned above, you need to have a deed of division to get the mortgage in one name. You can choose a local notary for this, but these days this process can also largely be arranged online by an internet notary. One of the parties must still appear during the signing of the deed of partition. The fees are often more friendly.

For an online process of the deed of partition, your application should meet the following requirements :

  • You both live in the Netherlands and the property to be divided is located in the Netherlands;
  • You have made binding agreements with each other on the division of the mortgage and related products;
  • There is no : bankruptcy, suspension of payments or receivership;
  • There are attachments on the property;
  • You have a command of the Dutch language both in writing and orally;
  • In addition, you have an e-mail address as communication is mostly digital.

 

Surplus value of the house

Once the outcome of the appraisal or valuation is known, either a surplus value or an undervalue will arise. Surplus value exists if the value of the home exceeds the outstanding mortgage. Undervalue exists if the situation is reversed and the mortgage is higher than the appraised value.

If it turns out that there is surplus value and you, the surviving partner, have to buy out your ex, you can pay this from savings or by increasing the mortgage. At the moment you wish to increase the mortgage, you should in any case have the value of the house appraised. This appraisal value may also differ from the value determined together earlier. The bank will consider both values and assess the case individually.

Undervalue and residual debt

If it turns out that there is an under-value, a residual debt will arise. You may make joint arrangements to redeem linked repayment products such as a savings mortgage, savings deposit mortgage or endowment insurance. On balance, if no other agreements have been made, you will be jointly responsible for this residual debt.

In most cases, the departing partner gives compensation to the acquiring partner for his or her share of the undervalue.

Existing mortgage

You jointly own your existing mortgage and in the situation of discharge from joint and several liability, most agreements with the bank or lender remain in place. For example, most lenders’ terms and conditions preclude you from entering into a new interest rate contract, but you are obliged to serve out the existing interest rate contract. Unless you wish to buy it off with any penalty interest.

Your existing mortgage will also consist of a repayment product, unless you have taken out a completely interest-only mortgage. If you have a repayment product linked to your mortgage, you should agree on this in the divorce covenant. In any case, you are entitled to half the value of this product. In some cases, the departing partner can also continue this product in a tax-free manner and link it to a new mortgage.

The rules of the game what exactly you can do with the redemption product also depend on the bank or lender’s underwriting policy, the rules around NHG and the tax authorities.

What choices are there around repayment products on your mortgage?
We assume that you currently have savings insurance (savings mortgage) or a bank savings account (bank savings mortgage). These are the most common repayment products in recent years. In the 1990s, many endowment insurance policies were also sold. Now these are also better known as usurious policies.

When you took out these mortgage forms, if all goes well, you made a conscious choice as to whether the policy accrues in Box 1 or Box 3. The difference between these two choices is tax-driven. An accrual in box 1 means that you do not have to pay capital gains tax on the value of the product during the term, and can only use the payout untaxed to repay a so-called owner-occupied home debt. If you chose to build up in Box 3 at the time, you have the freedom to use the benefit for purposes other than the owner-occupied home debt. However, the value of the product will then count annually when determining your assets in box 3.

In order not to make it too complicated, we will assume the most common situation in the examples below. Namely a redemption product with a savings component in box 1.

Split

If you have agreed to split the value of the redemption product, it is a matter of submitting this to the lender. It is impossible to say in advance whether the lender will honour this request. This is part of the overall assessment of the application for discharge of joint and several liability.

For instance, a lender may consider it necessary to keep the entire value of the redemption product linked to the mortgage. In such a situation, you may decide to compensate the departing partner for the value with your savings or exchange it for other valuable items. These are typically arrangements you can lay down in a divorce covenant. Cohabitants may arrange this between themselves how they divide things.

The disadvantage with an allowance for value to be paid out is that, as the departing partner, you cannot continue the redemption product with a new mortgage. In some cases, a departing partner does not feel good about this either and would rather make a fresh new start. Financially, this may not always be the most favourable choice.

Stop

The most radical choice is to quit the repayment product. However, you should then use the value to pay off the mortgage. Again, the lender has a say in the process. For instance, if they find that your income as surviving partner is too low for the outstanding principal, sometimes they can only grant discharge from joint and several liability if you stop the repayment product.

You will then still have to make an agreement with the departing partner about the balance that will be released.

So the choices to be made here do not depend only on your own wishes on this point. We can assist you in sorting out the various options and arranging them.

How does a bank assess your eligibility for the mortgage?
Fortunately, in this situation, there is more room for customisation with most lenders. For instance, a bank or lender should carefully assess whether there is a possibility of keeping the mortgage with a view to avoiding a foreclosure sale. After all, in such a situation, you will be a lot worse off and will no longer have a place to live.

Thus, we can guide the mortgage application and write a personal explanation based on your actual expenses and income.

In this assessment, it is important to have a good understanding of your financial position. In any case, a number of questions are important here and you can already prepare yourself if you are faced with this situation :

What is the development of your (savings) assets in recent years?
Have you been demonstrably able to save structurally in recent years?
Have you not taken out any loans (stacking up) recently?
Why are you yourself of the opinion that you can pay the expenses. This is a form-free text.
NHG management test
Because the banks have mutually agreed that home preservation is an important issue, the rules are slightly broader. This makes it slightly easier to keep an existing mortgage than to take out a completely new one. You can read more about this in this article on retention combined with NHG and a mortgage.

Keeping the mortgage and home as an undivided estate

Should you fail to take over the mortgage, you can also choose to leave the mortgage and home undivided for the time being. In many situations, this is to allow the children to grow up permanently in the current familiar environment. It was also common during the credit crunch to wait for better times to avoid residual debt.

Regardless of the motivation, it is advisable to make clear agreements about this period of undivided ownership. You could make agreements on the following topics :

What choices are to be made regarding extension of the fixed-interest period or legislative changes regarding mortgages.
Who bears the costs of maintaining the property;
Who can continue to live in the home and for what fee;
Right of first refusal if either of you does wish to take over the property in the future (at a pre-agreed value or valuation method);
Agreements on a future sale, such as the choice of the selling estate agent and practical matters such as who does the viewings and clears the house et cetera.
If you do not agree on the division of burdens, the law prescribes that the costs for divorced partners are paid half by each. Regardless of who lives in the property. This says nothing about the arrangements between you and the bank. You may make different agreements on this together, only the bank takes precedence over these agreements in case of payment problems.

By the way, the legal division rule only applies to owner charges. User charges such as gas/water/electricity are for the account of the occupying partner.

Discharge of joint and several liability for a mortgage with NHG

If you already have a mortgage with NHG, a new dynamic arises. This is because the foundation behind NHG has also drawn up rules that come into play if you are faced with a residual debt. In some situations, you are eligible for cancellation of this residual debt. However, then neither partner should be able to pay for the house on their own. You are then obliged to cooperate with the so-called Income and Assets Test.

In such a situation, the lender may continue the mortgage with NHG with you or your new partner. In the latter situation, a new borrower is added. In that case, the NHG standards of the time of application must be met. The new partner should then also become the owner, joint and several debtor and occupant. The 1% NHG premium does not apply again.

The attached diagram shows the procedure in the event of a relationship break-up if you have a mortgage with NHG.

Life insurance and joint and several discharge

When taking out your mortgage, the lender may have imposed the obligation to take out life insurance. Popularly called a life insurance policy.

The rule is usually that life insurance is mandatory for the amount borrowed above 80% of the value of the home. That risk of at least 20% the bank wants to have covered if you die prematurely. The minimum term is usually 10 years.

Once you face divorce and the procedure of joint and several discharge, you cannot avoid thinking about life insurance too. Usually, the solution is to terminate the old life insurance and take out a new one to suit your new situation. After all, if the old insurance policy continues, your ex-partner may still receive a benefit from this life insurance policy.

There may still be and value in the policy. Even then, you should consider this issue and agree on the division.

You may also have to deal with changed health conditions. If it turns out to be more difficult for you to qualify for a new life insurance policy, you could redraft the policy of the existing life insurance policy.

Divorce and life insurance

When applying for life insurance, you should include a beneficiary. Often this is the husband or wife. It also happens that the beneficiary is in a person’s name and the description spouse is not chosen. This can create an undesirable situation in the event of your death.

For example, if you are divorced and remarried and you die. Suppose you have personally named your former husband or wife as the beneficiary, the benefit from the death benefit insurance will actually go to this person.

If this is not your intention then it is necessary to get your insurance policy amended.

Should you decide to buy off the term life insurance policy, there may still be a surrender value. This is also the case with term life insurance. Especially with older life insurance policies, this amount can be quite open. In some situations, you can pay the costs of the procedure for taking over the mortgage from this.

Should my ex cooperate with the request for joint and several discharge?

If you are facing a situation where your ex-partner refuses to cooperate with the request for dismissal from the mortgage deed, this is a tricky situation. Legally, there is no injunctive relief to force cooperation. If your ex partner does not want to cooperate, then legal proceedings are a possible solution, but even that route does not guarantee success. The court considers the interests of all parties and a forced move is often not an option.

It is always wise to include in the divorce covenant a clear agreement on how the joint home will be allocated. We also strongly recommend agreeing on a deadline on this. In practice, this is often a tricky topic of discussion that can easily be pushed through.

Nevertheless, it is wise to continue talking about it and make clear agreements. This way, you avoid a situation where you, the departing partner, are parked for a long period of time. After all, if your ex-partner has no way of getting the mortgage into his or her name and you have not made any further agreements on the sale of the house, an awkward situation arises.

Recent ruling

Recently, the Rotterdam District Court ruled in a case where two ex-partners had been separated since 2006 and Mrs was still on the mortgage deed. She did not find this desirable and wanted to be discharged from the mortgage deed or that the former home would be sold. The court clearly ruled that this was not a reasonable and fair request and even required this lady to pay €1,787 in costs for the legal proceedings.

Even a divorce in which partners have been apart since 2006 is no reason for the court to force the husband to sell the property. So the woman in question is completely dependent on the whims of her ex-husband and only once the house is sold and the mortgage paid off is she free of all risks surrounding the mortgage.

However, the partner who wishes to take over the mortgage should do his or her best to get the mortgage in one name. In another case involving two former married couples trying to reach agreements on the property, the Rotterdam District Court is implacable. This ruling dates from 30 May 2018 and is fairly recent. There, the judge did allow the property to be sold. The husband has since become unemployed and is no longer paying the mortgage payments. This is an obvious situation where the judge put the wife’s interests ahead of her own.

To avoid such problems, it is wise to already have clarity on the feasibility during the divorce proceedings. Indeed, this can be determined relatively quickly with a quick scan for a mortgage consultant. Then both parties know with a high degree of certainty where they stand, prior to the filing of the divorce petition, and a plan B can also be determined.

If it turns out that taking over the mortgage by you or your ex-partner is not feasible, this option does not need to be investigated further and the sale of the joint home can be discussed. This will then make the further procedure clearer.

 

Should my ex-partner help pay penalty interest?

If you wish to take out a new mortgage or transfer your existing mortgage, you should observe the agreements from the old mortgage contract. Suppose the interest rate is fixed for a few more years, you may have to pay penalty interest.

Is my ex then also obliged to help reimburse this penalty interest? You only enter into the new mortgage is your wish and you cannot force your ex to contribute to this. Unless you agree on this. You may agree and record that together.

One argument that speaks in favour of a contribution is that when the house is sold, the costs will also be shared. Your ex-partner may be sensitive to such an idea and wish to reimburse part of the penalty interest.

Who pays the cost of the deed of partition?
This is a question that is often asked. Incidentally, the law does not stipulate anything about who should pay these costs. You have to agree on that yourself. The most common agreement is that each party bears half of the costs.

Incidentally, you can make arrangements in advance about the costs of division in your cohabitation agreement. In practice, we see that hardly any agreements are made about this, only it causes a lot of disagreement at the time of your relationship breakdown. If it is clear who is responsible for these costs, you no longer have to think about it.

The cost of dismissing joint and several liability also includes the cost of mortgage advice and the bank to put the mortgage in one name.

Divorce and credit

Did you take out a revolving credit or personal loan during your marriage? In most cases, this means you also signed for joint and several liability. This means that, as for the mortgage, you remain responsible for the obligations from this credit even after the divorce.

If you make agreements about these credits in the divorce covenant, then following up on these agreements is very important. In many situations, your ex-partner does not manage to get the credit entirely in his or her name. If you let this run its course, your ex can still withdraw money from this credit up to the limit and you will co-pay if payment problems arise.

This is shown, for example, in a Kifid ruling of 28 May 2018. The two former spouses divorced in 2004. In 2016, the ex-partner gets payment problems and ABN Amro also recovers this payment from the wife. The latter argues that the bank should have refused repossessions and does not want to be held liable for this debt. Nevertheless, the Kifid does not go along with these claims and rejects the claim.

If you do not adequately regulate the handling of the discharge from joint and several liability of a credit or mortgage, you can be pursued with this for years to come. For instance, in the case of a credit, this remains visible in the BKR until it is repaid and may hinder you from buying a house or taking out a new loan or private lease.

Tax rules

The moment you decide to buy over the other half of the house, you have to deal with new tax rules. At least if your old mortgage existed before 2013. A small example. Suppose you and your ex-partner have a €200,000 repayment-free mortgage and you wish to buy over half of the house that has a value of €200,000 as well. Then your new mortgage may only be €100,000 repayment-free to qualify for the interest deduction. You must repay the other half on at least an annuity basis.

You may then take another 30 years to repay the mortgage and deduct the interest.

There is also the so-called separation scheme for deducting mortgage interest during the separation period. You may still deduct mortgage interest for 24 months once you have left the property and paid the interest. This is only allowed during the period when the property has not actually been transferred and thus divided.

Specific situations are conceivable where you may deduct the paid charges as alimony paid. For the receiving partner, this is then taxed as being spousal maintenance. This depends very much on the circumstances and your personal situation to make any firm statements on this.

Are the costs tax-deductible for principal dismissal

The costs associated with modifying the mortgage are tax deductible. Since you are also taking over part of the property from your ex-partner, costs also come into play here. The notary will charge a fee for this. This part of the cost is not deductible as it is related to obtaining ownership. Only the cost of modifying the mortgage is deductible in your annual tax return.

Would you like help with the process to discharge joint and several liability? During a free introductory meeting, we can provide you with relevant information.

Preparing the procedure for dismissal of joint and several liability

What can I do myself to prepare for this procedure? The divorce process involves many issues. Although the decision to divorce comes with a lot of emotions and impact, there is also a business side to it. This allows you to take a structured view of your financial situation.

We recommend starting by collecting the following documents, which may be useful in determining the route of march :

  • Your marriage certificate possibly supplemented by prenuptial agreements;
  • Cohabitation agreement if you are not married;
  • The deed of registered partnership;
  • A deed of acknowledgement of your children if applicable;
  • Annual statements of your income and financial products such as a mortgage;
  • The most recent income tax return;
  • Pension statements of pensions accrued during the marriage or registered partnership;
  • Statements of debts and quotes from the mortgage taken out at the time.

Are you getting stuck in making arrangements or would you like help determining the financial feasibility of your wishes? In such a situation, a specialised financial adviser from our office can provide assistance. This way, you can make informed choices during the divorce proceedings with peace of mind.

 

Tell us your story!

As mortgage advisers, we can often help you get started with the first steps for the principal discharge during a free online introductory meeting. Feel free to request a call.

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