Introduction:
In 2016 there was a buzz among lenders to help divorcees navigate the maze of mortgage repayment. The proposal they came up with was a mortgage product some called the divorce mortgage. What it promised was the opportunity for a person to borrow enough money to buy out their ex-partner’s share in a family home for a certain period of time. It would allow one of the couples to stay in the home, making it a more affordable and less disruptive option for families with children. This mechanism would mitigate against couples selling their homes in wake of a divorce. It was quite the rave, but is this mortgage product available to Brits today? The answer plainly put is no. This product is unfortunately still an illusion, but what it promised was insight into the markets’ attempt to help divorcees with their joint mortgages. Many had predicted that the product would have been mainstream as early as 2017. Four years later we are no closer to it being a reality than we were back then, however, it is worth considering the circumstances that necessitates this type of mortgage product.
Context:
According to research from Nationwide, almost three in ten (approximately 28%) of couples who are going through a divorce end up having to sell their family home because one partner cannot afford the mortgage by themselves. As might be suspected these statistics are not kept in mind when couples take out a mortgage together and some live to regret their ignorance of these facts. Not only is divorce one of the more stressful experiences a couple could survive, but it’s also the chief reason for them to change their mortgage arrangements. It’s a very personal process which can turn out rather expensive.
Divorce usually results in the redistribution of assets and income. Often, the former marital home is sold, with both partners seeking somewhere else to live. Another frequent occurrence is that lenders often require divorcing partners to provide about a 25% deposit in order to buy out their ex-partner’s share of the home. Only then are some able to remain in their family home , because the original mortgage was likely obtained on the basis of a double income household. However a divorce mortgage would aim to make this an easier and more affordable transition, lenders said.
During a divorce the lender will consider any income (or loss of income) that arises from a divorce settlement before approving any new mortgage deal or adjustments. These financial terms can take a long time to finalise, and divorcing couples are often stuck with their joint mortgage for a while. During this time, they will remain jointly responsible for the monthly repayments, but for the spouse who has left the matrimonial home, these monthly repayments are not a desired burden and some opt to not pay it altogether. To be quite forward, the entire ordeal can be messy and it doesn’t help that divorce rates remain at high levels within the UK.
Recommendations
Having covered briefly the context and current situations divorcees find themselves in, it may prove helpful to consider three recommendations to this problem:
1. Apply for a guarantor mortgage:
A guarantor mortgage is a home loan where a parent or close family member takes on some of the risk of the mortgage by acting as a guarantor. This usually involves them offering their home or savings as security against the loan, and agreeing to cover the mortgage payments if the homeowner defaults or misses a payment. Some guarantor mortgages allow buyers to borrow 100% of the property’s value by using their parent’s collateral in place of a deposit. As might be supposed this is an option a divorcee may pursue if they are attempting to keep their family home. What one would do is find someone to guarantee that they will be able to meet their monthly mortgage repayments. The offered collateral from the guarantor will offer the lender some peace of mind that the divorcee’s monthly payment will be covered.
Please note that not all banks offer a guarantor mortgage. In the event where one doesn’t exist with your lender the divorcee may request for a joint loan with the ‘guarantor’, thereby making the person a joint borrower and owner with the divorced applicant. Both options, the joint and guarantor loans are solutions even if a divorcee opts for recommendation number 2: selling the matrimonial home.
2. Sell the home and divide the proceeds from the sale.
In theory, the most straightforward recommendation any advisor could make to divorcees is to sell the property, pay off the outstanding mortgage, split any remaining proceeds and then head off on separate paths. However this option often overlooks the emotional connection the divorced applicants have with a property, as well as the logistical issues it may throw up if children are involved. Needless to say, it’s the easiest solution out there.
3. Separate all financial ties from your ex-partner
This last recommendation goes beyond the current home issue and accounts for all future and financial problems that may arise between divorcees. Very few people understand that a former spouse’s financial footprint can follow you even after divorce. Credit agencies may consider who you are ‘financially associated’ with – this includes anyone you may have held a loan, mortgage or any other borrowings with. Your former spouse’s current and past financial struggles can negatively impact a lender’s view of your financial stability and could affect your mortgage prospects. It is advisable to apply for ‘financial disassociation’ from your ex through the credit agencies for your ‘financial divorce’.
Conclusion:
In 2016 lenders devised specialist mortgages designed for divorcees. These mortgages would allow borrowers to borrow at 100% loan-to-value, and charge minimal rates of interest in the first couple of months in order to give a bit of breathing space.
Sadly, there aren’t any such mortgages available today, and this though some lenders have put together initiatives aimed at helping divorcee borrowers. In this article we gave three recommendations of solutions divorced applicants can use with their lenders. Yes, there are other options available, but these three are fail-proof.
Finally, it is important to disclaim that if you or a loved one are considering divorce, or have taken the first steps to begin, it is important to seek advice from an experienced solicitor who can advise you of your options. For mortgage advice you should seek assistance from a suitably qualified mortgage broker such as Percom Financial Services. Call one of our representatives today and get the advice that best suits your situation.