3 July 2024
When dividing the joint house (for example, in the event of divorce or termination of cohabitation), it often happens that one party takes over the home with the mortgage, and the other party looks for new housing.
After years of constant decline, mortgage rates have risen relatively sharply since 2022. In principle, the party that stays in the house retains the old and usually more favorable mortgage interest rate. The departing party needs to find financing for a new home, but is confronted with higher interest rates on the mortgage market. In other cases, the house is sold, and it is unclear what will happen to the ‘old’ mortgage conditions.
A question we are asked a lot at the moment is what options and claims parties have in this situation.
The arrangements that the parties can make depend in part on the conditions that the mortgagee has attached to the loan. A frequently occurring provision is that both parties can continue the ‘old’ interest for an (equal or unequal) part of the outstanding debt. However, they must both actually buy a new home within a certain period of time, and agree among themselves on who ‘takes’ which part of the old debt. If they agree on this, they can therefore make an arrangement that they consider appropriate.
A provision that we often see is that in the event of the sale of the joint home, the party that is the first to buy a new home has the right to keep the low (old) interest rate. Here, too, there may be a term attached to the purchase of the new home. The party that only buys a new house later will then miss out.
If the property is not sold, but is allocated to one of the parties, the starting point may be that the mortgage loan (and old interest) remains linked to the property. Then the ‘only’ question is whether the departing party can be released from joint and several liability for the loan. He or she then has to find a new home and financing, at ‘new’ conditions and interest rates. The other keeps the lower interest rate.
In the latter case, in which no division appears to be possible (because the conditions do not offer such an option, or because the parties cannot reach an agreement on it), the question arises whether there is a legal basis for compensating the departing party for the loss of a favourable interest. Is the loss of that advantage actually a disadvantage? And if so, doesn’t the principle of liability law apply: everyone bears their own damage? In other words, why should the other person pay for (or at least share in) this disadvantage?
In addition, the extent of the ‘damage’ that requires compensation will often not be certain. After all, if the departing party still has to buy a new home, the interest rate on his new loan is not yet known. And maybe he or she doesn’t buy a new home, a loan outside the banking circuit (with family) can be taken out at a lower interest rate, or there are enough savings available to buy a home without a new mortgage. Does that then provide grounds for compensation from the other party, who may not have these benefits?
The finding of harm and the extent of that disadvantage on the part of the departing party therefore seem to me to be too speculative in nature. In addition, as mentioned above, the basis for reimbursement is still unclear.
However, the result may be unsatisfactory without further compensation. If necessary, the departing party will not only take out a loan at a higher interest rate, but will also be bought out at a market value, which, as a result of higher interest rates, will (for the time being) be lower than it was some time ago – although market movements are obviously impossible to predict. The leaver thus seems to be doubly punished, but it is highly questionable whether a solution to this in itself unbalanced outcome will be provided in the case law.
Do you have any questions after reading this article or would you like legal advice? Please feel free to contact us.
