Going through a divorce or legal separation can be a very difficult and stressful process, even if the separation is amicable between both parties. Untangling personal finances and separating joint assets fairly can be tricky and is often far from straightforward, particularly if you own significant assets such as the matrimonial home. This can be even more difficult and contentious where there are dependent children involved in the relationship. The decision on how to deal with the family home will, in most cases, have an impact on these children in many ways.
Unfortunately, 42% of marriages end in divorce, however one consequence of this statistic is that mortgage lenders are familiar with these types of situations. There are generally options available to you when it comes to refinancing an existing joint mortgage on the family home or getting a new mortgage facility to buy a new home.
It is not always an easy process, however, so it is important that both you and your ex-partner are aware of these various options so that you can make the best choice for each of you, and for the best interests of any children. In most breakups, one of two outcomes generally happens with regards to the family home. Let’s look at these two options in detail…
Selling up and moving out
You may decide to sell the property you own together, and both move out. Once the property is sold and the current mortgage facility has been repaid, any equity left will be considered a marital asset and will generally be split between both parties in whatever way you might end up agreeing. If you have problems deciding on how this sum should be split, you may need the help of a divorce or family solicitor and/or the court to help make this decision for you.
Once your finances are separated, each party may then look to buy a new home with the help of new mortgage borrowing in their sole name (or perhaps with a new partner). It is important to remember that one party may also now have child maintenance to pay, and this will be taken into consideration by any new lender when assessing their affordability.
Equally, one party may now be in receipt of maintenance, at least until any children come of age, and most lenders will also take some element of this into consideration when making similar affordability assessments.
Taking over the mortgage yourself
If one party can afford to do so, they might decide they want to take on the sole ownership of the current family home and remain living there. This might be particularly desirable if there are children involved and disruption of their living arrangements needs to be considered. It’s still a financial break from the ex-partner, in the same way that selling up and moving out is, except one party gets to keep the family home.
If you want to take over the ownership of the family home yourself, you’ll need to take out a new mortgage facility to refinance the current mortgage borrowing and ownership of the house will then transfer to you. You will then become responsible for all of the household running costs, including the new monthly mortgage repayments.
You may also need to ‘buy out’ your ex-partners share of any equity in the property. The starting point to finding the amount of any equity in the property is to get an up-to-date valuation carried out, which will determine its current market value. From there, you deduct the outstanding mortgage balance, leaving you with the amount of equity available to be split between the two parties.
Let’s cover off a simple example. If a couple own a house worth £200,000 and have an outstanding mortgage of £120,000, then there is £80,000 of equity available. If we assume this is split 50/50, then for one party to ‘buy out’ the other, they would need to raise a new mortgage of £160,000 (the current mortgage amount of £120000 plus the £40000 equity that the other person needs as cash ) This would still leave £40000 equity in the house, and they would be able to obtain a 80% loan to value mortgage.
Instead of making a cash payment to your ex-partner to cover their share of the equity, you may be able to negotiate a deal against another joint asset, such as joint savings or your ex-partners pension fund, for example. Your solicitor or financial advisor may be able to offer some suggestions and advice in this regard.
Deciding how much of the property is owned by you and how much is owned by your ex-partner is not always straightforward. It might be claimed that one partner has contributed more towards the mortgage costs and household running costs than the other. Perhaps they provided a larger cash deposit for the initial house purchase. Not everything will be split 50/50 and this is where mediation and good legal representation will be needed.
Bear in mind too that negotiation may lead to some substantial legal fees. This may wipe out any financial benefit that you are trying to secure. Ideally, both parties will reach a mutually acceptable agreement between themselves on an acceptable financial settlement, but if that isn’t possible then you may need the court to make a ruling for you.
What about if I can’t afford the mortgage on my own?
If you want to become the sole owner of your existing home, or you wish to buy a new home, but you cannot pay the mortgage on your income alone, you may be able to get a guarantor mortgage. A guarantor mortgage is a way of securing a mortgage when your financial circumstances might not be quite strong enough to fully meet a mortgage lender’s minimum affordability criteria.
Someone, usually a parent or close family member, acts as a mortgage guarantor for you. Providing they meet the eligibility criteria of the mortgage lender, they will take on some of the mortgage risk by acting as a safety net for your borrowing, committing to covering the repayments if you fail to keep them up.
For this reason, becoming a mortgage guarantor is quite a substantial responsibility. If you choose to go down this route, ensure that your guarantor takes independent legal advice and talks to a mortgage broker, such as us here at Mortgage Light, before they agree to anything. This is to ensure that they are fully aware of the commitment they are considering taking on.
Getting another mortgage after a divorce
If you are still named on the joint mortgage of your former marital home, it can be more difficult to apply for a second or additional mortgage after a divorce. Some lenders will instantly refuse your mortgage application if you are already connected to another existing mortgage.
You can be named on two residential mortgages, however, this is generally the maximum accepted. The main thing is that you can evidence that you can afford the repayments on both mortgages. Your new lender will usually deduct the monthly payments you might need to be making towards the original mortgage from your monthly income to determine the maximum amount that you can borrow for your second property.
It is advisable to turn to a mortgage advisor and broker for help and advice. At Mortgage Light, our years of experience and expertise means we know which lenders will understand and accept such situations, minimising the risk of any rejections. We can also help find you the best deal for your circumstances, taking into consideration that these may be going through a period of some change.
Divorce and mortgage payments
It’s very important to note that even if you have moved out of the family home, due to the difficulties of going through a divorce or separation, you must keep making the mortgage repayments. When two people take out a mortgage, they both agree to be equally liable for it until the mortgage has been paid off – not just while you actually live in the property.
Any current or historic mortgage arrears will have a serious impact on your ability to get another mortgage in the future, either in your sole name or jointly with someone else. The same goes for your other joint financial commitments, such as credit cards and utility bills. It’s important to work with your ex-partner to make sure that these do not suffer during any dispute.
Until you have gone through one of the options suggested above to separate your finances, you are both financially tied to each other. This means that if the mortgage or other financial commitments are not paid on time, both your credit histories could be damaged as a result.
If you should get into financial difficulties during a separation and your credit score suffers as a result, then you may still be able to secure a mortgage offer, however, your options will be more limited and the cost of borrowing will inevitably be more expensive. At Mortgage Light, we know the lenders that are more flexible in these situations, so don’t hesitate to contact us if you are affected in this way.
As soon as you know that you will be separating, be sure to contact your lender or mortgage advisor and broker to update them on your current circumstances. This is all the more important if you think you might struggle to meet the mortgage payments.
Unfortunately, divorces are not uncommon, so lenders will be familiar with and sympathetic towards your situation. If they haven’t been advised of why you may be having problems making your repayments, then they can’t do much to help you. The majority of lenders will appreciate early notice of any potential issues and may also make suggestions to you as to how they may be able to provide some additional help. They might even offer you a repayment holiday to help ease the financial strain and give you a little breathing space to sort out your personal and financial affairs.
There’s a lot to think about and consider when going through a divorce or separation – especially when it comes to your mortgage. Everyone’s situation will be slightly different, so you will probably have a number of unanswered questions. If you would like to speak to an advisor about what you should do next, please get in touch. We’re here to do what we can to help, should you be unfortunate enough to have to go through this process.