Your responsibilities, now & in the future
We hope this article brings some comfort in answering those difficult divorce and mortgage questions. This article guides you through your options when considering your mortgage, during and after your divorce.
There are many financial agreements and discussions that need to take place during the divorce process; a priority of which should be your mortgage on your property.
With divorce rates in the UK increasing year by year, researched by the Office for National Statistics (ONS), more and more divorcing couples are looking for advice and direction when it comes to their mortgage on their marital property.
Coupled with this is the effect of the pandemic on the UK’s separation statistics. A leading British Law firm, Stewarts, noted that they had an 122% increase in divorce enquiries between September and December of 2020, compared to the same period of the previous year.
The average length of a marriage at divorce stands at 12 years (ONS) and with this in mind, many couples will still be paying a mortgage on their property at the time of their divorce.
So, what does this mean for you, your lender and your mortgage payments, now and in the future?
What should I do first?
Before we start the process of discussing the options regarding mortgage and divorce, the first thing you should be aware of is the upkeep of your current mortgage payments in order to protect your credit score.
If you have a joint mortgage on the marital home, your responsibility to pay this mortgage is equal with your ex-spouse. If you move out of the property and your ex-spouse continues to live there, you are still liable for your portion of the mortgage payment.
If you were to abstain from making your share of the payment, the lender may pursue you, which will negatively affect your credit history and could affect your ability to obtain a mortgage after divorce. It is important to make these payments in order to protect your future wealth.
Should I let my lender know?
Absolutely, contact your Mortgage Lender as soon as you can.
With traditional bank lenders, as part of their agreement with you, they must be sympathetic to your situation. This means that many bank lenders will be open to a conversation on how they can help lessen the financial stress and may offer a ‘mortgage holiday’ or temporarily transfer the mortgage onto an ‘interest only’ basis.
Should we sell the property?
It is often the case that selling the property will release much needed funds in order to place a mortgage on your own property after divorce. We often advise that this is the best asset to purchase as you will have an equity release that is much higher than your initial down payment, due to your paying off of the mortgage each month. This means that you will have a larger deposit for a new home of a similar value, lowering the interest rate and increasing the likelihood of your new mortgage application being accepted.
Will selling the property benefit my future mortgage?
It is important to understand why a larger deposit will affect your mortgage options for your future home.
Lenders use the “loan-to-value” (LTV) ratio which is the percentage of the value of the property that is used as the mortgage.
For example, a property’s value is £100,000. The mortgage you arrange is a 95% mortgage meaning that the mortgage equals £95,000.
The higher the LTV percentage, the higher the interest you will pay on the mortgage. Lenders will ‘stress test’ your finances to see whether you could afford the repayments in certain circumstances, e.g. if interest rates were to rise.
The larger the LTV percentage, the ‘riskier’ the mortgage is to the lender. This means that the lower you can make the LTV, the more likely you are to have your mortgage application accepted. This can be done by having a larger deposit placed on the new house, e.g. requiring an 80% mortgage.
Or, should I take over the mortgage on the marital home?
If you have an income that is satisfactory for the lender, meaning that you can afford the payments of both you and your ex-spouse, this may be something that the lender will consider. If this is granted, the lender can remove the name of your ex-spouse from the mortgage agreement. Your ex-spouse may require the return of equity via payment, or this can be ‘offset’ in the divorce’s financial settlement. Please get in touch for more information on your financial settlement options.
If this is not an option or you cannot afford this alone, then you can apply to re-mortgage the property in order to purchase your ex-spouse’s share.
It is important to remember that lenders will take into consideration your ‘income’ when offering a mortgage. Income is not only limited to your salary but can include ‘child maintenance’ and state benefits. It is important to speak to your lender about this if applicable to you. In regard to child maintenance, even if the maintenance was not awarded by a court order, an informal but regularly paid agreement may be suitable for some lenders. when considering your income and mortgage value. Equally, benefits such as Child Benefit and Carers Allowance may be accepted as an income value.
Please make sure to reach out for professional advice before making any decisions regarding your mortgage during your divorce. The financial elements of a divorce are crucial for your future and should be discussed with a trusted adviser to consider all the options available to you.
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Thank you to Rajesh Modha from The Financial Lab for this informative blog post. Contact Rajesh HERE for advice on divorce and mortgages.