How does divorce impact your mortgage?

Couples going through a divorce are facing tougher negotiations over existing mortgage deals, which are being negatively impacted by more stringent requirements of lenders.  If a couple has taken out a mortgage prior to Spring 2022, they are likely to be on a much cheaper rate, often leading to disagreement over who should keep the mortgage.

I’ve teamed up with Lucy Stamford of Westwood Mortgages to review some of the important considerations:

• Mortgage rates are climbing and reaching over 6% in most cases; interest rates are at the highest level in 14 years.
• There have been substantial changes in the mortgage market in the last 12 months with changes to mortgage products and the way lenders assess affordability.  The cost-of-living crisis has coincided with 14 consecutive interest rate rises since the winter of 2021.
• Not all lenders offer a transfer of equity into one party’s name, but in principle most will, provided affordability and lending criteria are met.
• Early repayment charges will usually apply during the term of a fixed rate and will have to be paid if the mortgage is redeemed.  These can be substantial, up to 5% of the loan in some cases.
• The cost of living and its associated stresses have impacted couples and mortgage disputes can lead to an increase in cases before the Family Court.
• Alongside property, if you’re going through a divorce, you should also look at your other joint financial assets e.g savings, pensions and any liabilities.
• In 2021 there were 113,505 divorces, a 9.6% increase from 2020 (ONS) with nearly half of all marriages now ending in divorce.
• A joint mortgage must be paid during a divorce which is paramount to the future availability of lending options for both parties.

Affordability

Will one party be more capable of passing the new stringent affordability calculations than the other? Age is a huge factor in assessment of mortgage payments and the term is usually restricted by retirement age older clients separating will struggle more than those with more available working years to repay the mortgage.

Lenders will usually take 100% of a basic wage for an employed person, plus some or all overtime or commission but a lot will depend on how regularly this is received.  For the self-employed, it depends how long a person has been self-employed and whether you’re a sole trader or limited company, amongst other factors.

Where maintenance payments are made, to be considered as income by most lenders these usually must be evidenced for at least three months and for some lenders up to 12 months.

A parent or sibling can be added to some types of mortgages to help with affordability, but the availability of these mortgages is impacted by the age of the family member and their existing commitments.

It’s important to take appropriate legal and mortgage advice when considering options regarding an existing mortgage on divorce or reviewing mortgage capacity.  It’s now common practice for there to be a joint borrowing capacity report from one independent mortgage advisor which can assist the parties, and the Court, if necessary, in reviewing both parties housing needs and how these can each be met.