Interest rate disparity in divorce settlements

In divorce negotiations, the interest rate on a mortgage for the marital home has become a significant factor, especially for couples who bought property during periods of historically low interest rates, such as between 2019 and 2021. These couples are now dealing with much higher interest rates, which have made new loans significantly more expensive.

Financial impact on departing spouse

The financial impact of this disparity is considerable. For example, a loan with a remaining balance of 600,000 euros, repayable over nineteen years at a rate of 1.3%, gives the spouse keeping the property a significant financial advantage. If the other spouse were to take a similar loan at today’s market rate of 3.76%, the same monthly payment would only cover a property valued at around 326,000 euros, compared to 430,000 euros at the lower rate.

Legal classification of interest rate advantage

The legal classification of this interest rate advantage remains a point of contention. Currently, the beneficial rate is not considered a shareable asset but can be treated as an "indirect economic advantage" arising from the divorce agreement. This allows the advantage to be considered in the overall balance of the agreement, even though it is not classified as an asset in the liquidation state.

Methods to quantify the advantage

Various methods have been proposed to quantify this advantage, ranging from calculating the total interest cost over the remaining loan term to estimating the present value of the debt at the end of the loan or on a probable holding period. Each method has its own implications and limitations, such as assumptions about how long the recipient will keep the property or the risk that the advantage might disappear if the property is sold.

Legal mechanisms for compensation

Legal mechanisms to implement compensation for this advantage include adjusting the property’s attribution value, increasing the buyout amount, providing for a deferred additional buyout, integrating the advantage into the compensatory payment, and using auxiliary measures such as the recipient taking over all share costs or attributing other assets to the departing spouse.

Challenges in contentious divorces

In contentious divorces, the argument for considering the interest rate disparity is more limited, as the judicial liquidation of the marital regime typically does not take into account the present value of the debt. However, it can still be presented as an element of the charges and future living conditions in the discussion of the compensatory payment.

Practical advice for practitioners

Practitioners are advised to obtain the bank’s written agreement on the release of the departing spouse, verify the recipient's ability to bear the loan alone, justify the compensation method in the deed, and involve the notary in advance to ensure the liquidation state is accurately documented. These steps are crucial to prevent any reclassification for tax purposes or subsequent legal challenges.