Your relationship has irretrievably broken down and are looking to finalise your finances. Interest rates are continuing to climb and there are whispers of a recession. Do rising interest rates affect your separation? It is essential to consider how changing financial circumstances might impact it.
If your property matter goes to a Court hearing, the Court is going to consider you and your ex’s assets and liabilities at that time, as well as considering significant changes in financial position (for example, if your ex makes a considerable purchase) should it be appropriate to do so. An in-depth discussion of proprety settlements can be found here. However, the regular ebb and flow of each party’s financial positions cannot all be considered, as it is simply far too complicated to account for every dollar in and out over what could be a period of years.
The Complication of Property Price Increases
Usually, a major asset in any separation is going to be a piece of real property. That might be the home in which you lived, an investment property, or both.
Over the last few years, the significant increase in property prices across the board has had a material impact on outcomes in separations. For example, if you agreed to buy out your ex’s proportion of the property, then you probably did so with a good idea at the time about:
- the likely purchase price, based on an agreed valuation;
- the interest rates; and
- accordingly, your ability to borrow the necessary amount from a bank to complete the deal.
However, if you got a property valuation at the start of your separation, then hit a few hurdles and were still finalising things 9 months later, there could be a significant change in property prices. What happens if the house you thought was worth $900,000 is now actually worth $1,500,000? No doubt your ex (who stands to gain from the buyout) is going to seek a new valuation.
Can you borrow another $300,000 (half the increase) to buy out your ex’s interest still? Does the change mean you need to rethink the best outcome?
These kinds of significant changes can make a big difference to outcomes. For example:
- the person being bought out has a significant amount to gain;
- the person buying might not be able to complete the deal anymore;
- if the property is to be sold, both parties might see a good gain.
But now we face a different challenge, and one that’s a bit more speculative – what impact will rising interest rates and challenging economic conditions have?
Rising Interest Rates and Separation
The real difficulty here is that nobody can reliably predict what will happen. However, in very broad terms, we can observe that:
- After general increases over the last few years, property prices in Victoria have trended downwards for the first time recently;
- Interest rates have gone up recently and will probably continue to do so;
- Because of this it will be harder to borrow money.
So, if you’re in the middle of your separation, what should you be considering?
The first thing to consider is speed. If you’re in a position to finalise your separation on terms that you can accept now, then it’s worth thinking about trying to make that happen. After all, with some financial uncertainty ahead you might stand to gain something, but you could also stand to lose quite a bit too.
The second thing is to be carefully looking at property values, ideally in conjunction with a qualified real estate agent or valuer. If the outcome you’re looking for involves purchasing something, then you might need to consider how your borrowing power will change over time. If you’re looking at selling your interest to your ex, then you want to be conscious of any indications that property prices might take a big drop over the coming months.
This doesn’t necessarily mean you should jump at getting a new valuation every month. Every new valuation you get is an opportunity for delay and dispute in your separation process. And, of course, the results might not always be what you expect.
The Short Answer: Get Advice
Turbulent economic conditions make for challenging decisions, especially when those decisions involve a bit of prediction about things that might or might not happen.
At the end of the day, taking solid advice from good property, financial and legal advisors can help guide your decision. At the very least, you can be well informed and know that you are basing your direction on the best advice possible in the circumstances. Our team at Just Family Law can advise you on what would constitute a fair arrangement. Give us a call on (03) 9793 7888 or send us an email at admin@justfamilylaw.com.au