As if divorce itself wasn’t bloody enough, separated spouses also face a wretched time sorting out mortgage finance.
More than 150,000 couples end their marriages each year. With such a huge market you’d think there would be a raft of mortgages available for divorcees. But the reality is that lenders are wary.
Upon divorce, money is normally tight and resources are split between two homes. The heady mix of financial and emotional turmoil could explain mortgage companies’ reluctance.
Most couples sell the marital home in order to afford two separate properties. The divorce court financial settlement aims to give separating couples as much independence from each other as possible. Sarah Anticoni, a partner at Charles Russell solicitors, says courts tend to want to leave the person who lives with the children mortgage-free, and therefore as risk-free as possible. If there was a large amount of equity in the former family home, this will in general go to house the non-earning spouse.
The breadwinner – often the husband – has a greater ability to get a mortgage. Salaried divorcees get the same treatment as any other borrower, although they may be laden with financial commitments, and often have little in the way of a deposit.
Maintenance payments are treated by lenders in the same way as unsecured loans. So if you hand over £20,000 a year to your former partner and earn £60,000, your income for mortgage purposes is £40,000.
If there isn’t enough equity built up in the family home to house the ex-wife and children, then what? And getting a mortgage based on maintenance income alone can also be pretty tough.
Halifax says it only lends on half the maintenance, and even then, only when it’s paid under court order. Where someone with a salary of £20,000 could be offered a £80,000 loan, the non-working ex can only get £40,000 on annual maintenance payments of £20,000.
Abbey and Cheltenham & Gloucester also require a court order, and will only accept maintenance payments for the mortgage if the applicant is working and receiving a salary as well.
Ray Boulger, senior technical manager at John Charcol, says that if you go through a good broker and if you have a reasonable deposit, companies can take a kindlier view.
Portman and Kent Reliance building societies may consider maintenance payments but only with a court order and if there is a deposit of at least 25 per cent. Even Abbey and C&G might be more amenable to loans where there is a 25 per cent deposit. L&C, a mortgage broker, says it can also place maintenance payment business, but mostly only with a court order.
Yorkshire Building Society has stepped in with a lifeline to divorcing couples in the form of its Fresh Start mortgage. The mortgage lends up to 100 per cent of the property value and accepts maintenance without salary.
You don’t even need a court order to vouch for the income. A solicitor’s letter stating the terms will do. The maintenance payments are even grossed up, so Yorkshire can offer higher loans to value. So, someone receiving £15,000 annual maintenance payments could effectively borrow on multiples of income of £19,230.
One variant of the mortgage gives borrowers an interest-free initial six months in return for a slightly higher interest rate, which helps them recover financially, or kit out the new home.
Simon Jones, director at Savills Private Finance, says that where children are soon to leave full-time education, women on maintenance often get short shrift from lenders, as their maintenance may drop.
Salaried ex-husbands may want to guarantee loans, to facilitate a larger mortgage for the ex-wife. But many lenders reject the solution, as guarantors aren’t always reliable.
Couples may agree for the ex-wife and children to stay in the family home. However, lenders won’t let the husband off the mortgage unless it’s paid down to a level the wife can manage on her own, or is redeemed completely.
Ex-husbands acting as guarantors, or who remain on the mortgage of the family home, find that their borrowing to fund a new pad is reduced.
If you remain part-owner of the home and you buy elsewhere, you lose the capital gains tax relief on the family place after three years, as it is no longer your primary residence.
You should also beware, if you are selling the home, of heavy early redemption penalties on the existing mortgage. You may be able to negotiate with the lender to defer the penalty, transfer the loan to a new abode or persuade the lender to waive the cost completely.
One final, but important warning. Divorcing couples can be angry enough to stop all mortgage payments pending the court settlement. Remember, if payments are more than two months behind, this will drive you into the arms of the sub-prime lenders for your next mortgage – where you will pay a minimum 1 percentage point more to borrow.
www.divorceaid.co.uk
