The divorce rate in Britain has been rising over recent years and, according to one recent report, now stands at 40% ‘ one of the highest rates in Europe. Add to this the break up of unmarried partners and it quickly becomes clear that many men and women face financial upheaval and trauma, to say nothing of the emotional effects upon the individual and their family.
It is also a fact that divorce and partnership break-up affects people across the socio-economic spectrum. From rich to poor, college professor to burger flipper, homeowner to tenant, the effects of divorce can be equally devastating. One of the biggest problems often concerns the roof over your head.
In some circumstances, separation can be amicable and managed with limited disruption. However, in others it can be painful and acrimonious, and the division of wealth and property can become problematic.
Divorce follows a certain legal process and can be difficult enough, but the break-up of an unmarried relationship can sometimes be even more complex if there is no clear framework for resolving the share of the assets and responsibility for the liabilities.
One of the main concerns in a divorce situation is resolving who will live where, and how the finances are arranged to ensure this happens.
One typical scenario involves a maintenance order being granted, requiring the husband and father to contribute to the costs of maintaining the family home. He may also want to buy a new property himself and will therefore have responsibility for two separate mortgage payments.
Even with a court order requiring the husband to pay the mortgage and other costs, he may be unwilling or unable to pay, leaving the wife with the house ‘ and the debt.
Another scenario is the increasing trend to make a one-off settlement based on a share of the equity ‘ rather than paying maintenance ‘ remembering that when couples agree the equity share, the equity is the property value less mortgage debt, not the property value alone. This approach, however, requires one party to be capable of paying an increased mortgage commitment and it is not always easy to remove the other party’s name.
Irrespective of the arrangement it is essential to remember that both borrowers will remain liable for the whole mortgage debt on a joint and several basis, until they are legally released from their covenants by removal from the mortgage deed. Any arrears which accrue due to non-payment of the mortgage ‘ by either party ‘ will be registered against both parties until this release takes effect.
Lenders are generally cautious in dealing with the problems caused by partnership breakdown due to the frequency with which problems with impaired credit occur in such situations. Lenders will also be concerned with the future affordability position, given the likely size of the new borrowings in relation to income that will be needed to resolve the situation.
When judging ongoing costs, lenders will take into account the full monthly payment, irrespective of any private arrangements made between the couple. They will also want to see proof that proceedings have started if the parties are separated but not yet divorced. This is because they need to be clear of future commitments. Lenders do not usually take income from maintenance payments as ordinary income to add to earned income ‘ even with a court order. This is because the payments may not be made and may cease when the children reach 16.
Clearly, the key to a successful resolution is the ability to borrow as much as is prudently possible. Lenders who offer above-average income multiples have a head start, particularly where there is no history of arrears, just a need to borrow enough to pay off the other party or maintain two mortgages.
However, there can be a tension between the need to borrow more and the existence of missed payments caused by the trauma of the divorce. The borrower needs to borrow more, but the existing lender may be reluctant to lend more due to arrears caused by the separation ‘ even though the arrears were caused by that separation.
Other lenders may be even more cautious, as there is no positive payment history for them to base a decision on. It then comes down to a question of lenders pricing for risk ‘ there may be a lender that accommodates them, but at a rate that is unacceptable to the borrower.
Along with redundancy, divorce is a principal cause of mortgage arrears. Clearly, there is a need for adverse credit products in this sector of the market to get people back on their feet. A successful resolution will mean that two or three years down the line, with a positive payment profile behind them, borrowers can move back into the prime market and avoid paying rates that are priced for habitually poor payers. Where the husband moves out of the marital home, he needs to be able to support the mortgage on the home where his wife and any children live while also supporting a mortgage on the new property.
The traditional lender’s approach is to require the combined debt to be covered by the normal income multiples. But a more favourable approach ‘ adopted by a handful of lenders ‘ is to treat the mortgage payment as a loan commitment and deduct the annualised payment from income, before applying the multiples. This helps to produce a greater sum for the new loan compared with the traditional approach.
Assume an existing loan of £50,000, with a monthly payment of £300. The husband has an income of £30,000. Using the traditional method, a new loan of £55,000 would be available (£30,000 x 3.5 = £105,000 less £50,000 = £55,000). However, the alternative approach could make £92,400 available (£30,000 less £3,600 = £26,400 x 3.5 = £92,400).
Another approach is the let-to-buy solution. This is where both parties to the original loan and property move out of the property and make the existing mortgage fully self-supporting through a let-to-buy transaction. This leaves each individual free to buy new properties on their own, subject to normal terms and without any deduction against their individual incomes.
Another solution is to use a secured loan to pay off one of the parties. It may not be advisable or possible to borrow more from the existing lender, or switch the whole loan into a new lender ‘ so leaving the existing mortgage alone and using a second charge to raise the necessary capital could work well.
With a growing market, lenders will be keen to take the opportunities presented by the increasing trend of divorces, subject to satisfying themselves that they are managing the risks involved. The principal risk is one of over-commitment, as the borrower may have to support two or more mortgage payments, so any extra exposure to this will need to be balanced by clear affordability calculations.
Broker advice is key ‘ not just for arranging a mortgage but also for protection. Any original life policies written in joint names will need to be reviewed and possibly cancelled and surrendered where there is a value that will need to taken into account in any resolution. New life assurance in separate names will be required for anyone continuing with a mortgage debt.
Any approach that takes into account the particular needs of divorced people can be considered a genuine assistance if it results in a financial solution that is affordable, and releases the parties involved to begin new and independent lives.
Stuart Johnson is sales director of TMO
Lenders will not usually consider maintenance payments when calculating how much a divorced client can borrow.
Problems can arise when one partner is left supporting two mortgages.
Lenders calculate affordability in these cases in different ways, so it is worth shopping around.