Divorce may end a marriage legally, but it does not end a joint home loan. When spouses who have jointly borrowed money to buy a house separate, questions about EMIs, property ownership, loan liability, and the proceeds from a potential sale can become complicated.
A divorce settlement is an agreement between the spouses. It does not, by itself, alter the contractual relationship between the borrowers and the lender.
So couples should therefore take loan liability and property ownership as two separate issues when negotiating the divorce settlement, legal and tax experts say.
The Bank Does Not Automatically Accept The Divorce Settlement
A joint home loan generally creates obligations towards the lender that continue after divorce.
According to Advocate on Record at the Supreme Court of India Vishal Gehrana of Karanjawala & Co, a divorce does not automatically remove a person’s liability under a home loan. If both spouses are co-borrowers and the agreement makes them jointly and severally liable, the lender can usually seek repayment from either borrower.
This means that even if a divorce decree or settlement specifies that one spouse will pay all future EMIs, the arrangement between the couple does not necessarily bind the bank.
As Anita Basrur, Partner - Direct Tax at Sudit K Parekh & Co LLP, points out, a private settlement between spouses does not eliminate liability to the lender. The bank can still pursue either or both co-borrowers if the outstanding loan is not paid.
Therefore, a spouse should not assume that they are financially protected simply because the divorce settlement assigns the EMI responsibility to their former partner.
The borrower's liability typically ends only after the lender formally releases them, such as through an approved refinancing or restructuring of the loan.
Until then, missed EMIs can affect the credit history of both borrowers.
Loan Liability And Property Ownership Are Different
In a co-borrower case, both spouses have equal ownership of the house.
That is not necessarily the case.
Property ownership is determined by the registered title documents and the ownership shares recorded in them rather than who pays the EMIs.
A person might be a co-borrower without having an equal ownership interest in the property. Property ownership and loan liability can be different in different proportions.
If one spouse wishes to maintain the property after divorce, the couple needs to proceed with the transfer of ownership. In such a transaction, stamp duty, registration and other legal requirements may be required.
There is also the distinction between ownership and residence rights. Under the Protection of Women from Domestic Violence Act, a woman may have a right of residence in a shared household even if she is not listed as the property’s owner.
Consequently, divorce settlements should contain both the title to the property and the outstanding loan.
What Can Happen When The Couple Sells The House?
Selling the property would be another option if neither spouse wants to retain the home.
If the property is mortgaged and a home loan is outstanding, the secured loan generally needs to be settled as part of the sale process. The outstanding amount is typically paid from the sale proceeds, after which the remaining amount can be distributed according to the parties' ownership rights and their legally agreed arrangements.
If a property is sold for 1 crore and the home loan is still outstanding for 60 lakh, then that loan liability will be addressed first. Then the remaining amount will be addressed according to the relevant ownership shares and settlement terms.
And selling the house can also create tax implications.
Capital Gains Tax May Apply
Anita Basrur explains that the sale of a property can result in capital gains tax, depending on the purchase price, selling price, holding period and applicable tax provisions.
The tax position should therefore be assessed separately for each spouse based on their ownership interest and the circumstances of the transaction.
Couples should not assume that the entire sale proceeds represent tax-free money after the outstanding loan is cleared.
How Divorcing Joint Borrowers Can Protect Themselves
A few precautions can help reduce financial disputes:
- Clearly document property ownership: Record the ownership percentage in the relevant title documents.
- Keep financial contributions documented: Maintain records of down payments, EMI payments, and other significant contributions.
- Do not rely solely on private EMI arrangements: A divorce settlement between spouses does not automatically alter the bank's rights.
- Obtain the lender's approval: If one spouse is supposed to exit the loan, seek formal refinancing, restructuring, or release from the lender.
- Separate property and loan issues: The divorce agreement should clearly address ownership of the house and liability towards the lender.
- Consider tax consequences: Understand potential capital gains and other tax implications before selling or transferring the property.
Ultimately, the most important point for joint borrowers is that a divorce decree does not rewrite a home-loan contract. A spouse who wants to exit the loan should ensure that the lender formally approves the change rather than relying only on an agreement with the former partner.
Similarly, deciding who owns the house requires examining the title documents, not merely the EMI payment history.
For couples going through divorce, addressing the home loan, property title, repayment responsibility and potential tax consequences separately can help prevent significant financial and legal complications later.
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