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Richard Campo talks us through the general mortgage options during a divorce.
In a divorce, what happens to the mortgage on the family home?
There are a number of options. An obvious point to make is that as brokers in this sort of situation we are very mindful that it’s a very delicate time for everyone involved. We have to deal with things carefully, which is true of any mortgage, but it’s especially the case when we’re dealing with divorce.
The key thing is affordability. On a traditional mortgage, we look at income and outgoings – that’s fairly straightforward. But here, there might be divorce orders and settlements in place so it’s sometimes not as clear.
WIth the family home there are three fundamental options. You can sell the property – and that might be preferable in some situations. It might be that remortgaging is the best thing to do, because you may need to remove a partner from the mortgage and take it on yourself. If you don’t want to remortgage, there’s something called a further advance, which is extremely relevant at this moment in time.
We’re in July 2023 and interest rates have increased substantially. You might have arranged a mortgage a year or two ago on a nice 1% to 2% rate. You don’t really want to be getting rid of that. Instead, you can go back to the bank and arrange a further advance – a top-up loan that you could use to buy out your ex-partner. It avoids getting rid of the main mortgage and ending up on today’s higher market rates.
People are often surprised that it can be better coming through a broker even when dealing with your own bank. We have access to underwriters who apply a lot of discretion in these situations. There are specific rules around this, particularly where maybe your income has fallen or is not sufficient to support the loan on the face of it, where we can help.
So whether you sell remortgage or organise a further advance, I strongly urge you to talk to a broker. I’ve even told people to make a direct approach if it’s the right thing to do. We just want you to get a good outcome at a difficult time.
What options do divorcing couples have with regards to their mortgage?
The main focus here is affordability. You need to consider whether you can afford the mortgage on your own. Either way, we’ve got a really good basis for a conversation. We’ll obviously help you through it and let you know the options.
You might want to take the mortgage over, or it may be better to sell the property and buy two smaller homes. Whatever the situation is, we’ll support you through it.
Can I take over the joint mortgage after divorce?
Yes, absolutely. You might not need to borrow more money – you may even get some money out of the property. Perhaps you get a lump sum of money in the divorce which means you can reduce the mortgage. You can take on the mortgage as a sole basis rather than jointly. It often won’t trigger penalties with the banks, so that can be quite a good outcome.
Again, it goes back to affordability. Banks will offer you at least 4.5 times your income in terms of borrowing. If you earn over say £75,000 or £100,000 some banks go up to 5.5 times your income.
There is a little caveat there – that’s all less your outgoings. For example, if you want to take the mortgage on but you have to pay a large amount of maintenance each month, that will be factored in. On the flip side, if you have no other income but will be granted a maintenance income, we can use that for the mortgage.
That doesn’t necessarily fit into that 4 to 5 times multiple, so you might want to restructure the mortgage to make it fit within a maintenance agreement. But just as a simple answer, you can turn a joint mortgage into a sole one, as long as we can evidence that it is affordable.
How do I buy out my ex-partner’s share of the property?
This is normally taken care of with the agreement you reach, whether it’s informal or formal. We actually see this a lot more where people have been together for a very long time but never married. Although it’s not a divorce, your finances may be very intertwined and you get common law status.
It’s really a legal process and we don’t have too much involvement with that. What we do is make sure you’ve got enough money to do what you want to do. That may be raising money to buy out the partner or maybe even reducing the loan.
I’ve done this long enough to see every type of outcome and they’re all very bespoke to the situation itself. The main thing is to speak to a broker first. Make sure the numbers stack up before you talk to a solicitor.
You often find that you deal with a solicitor in terms of the court proceedings but then their firm doesn’t deal with the conveyancing, which is the legal part. It’s all very disjointed. Let us knit that bit together for you and keep your costs down.
What happens if neither party can afford to buy out the other?
This is the blunt answer – you can have to sell. There is no way around it. When you can’t afford it there are two scenarios: sometimes a bank will offer you more money than you’re willing to spend, and sometimes you’re willing to spend more than a bank will give you.
If there’s a mortgage in place, you’re separating and neither of you can afford it on your own, selling might be the best outcome.
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Can I apply for a mortgage during a divorce?
You certainly can. Some people can try and be a little bit cute around a good joint mortgage and try to change things while proceedings are going on. Just be mindful that every lender in the country will ask whether anything is likely to happen in the future to affect your affordability.
Please don’t hide anything from us because it tends to come out in the wash. Equally, you shouldn’t put yourself in a position where you’re doing something you can’t afford.
But you absolutely can apply during the process. That isn’t a problem – but we need to take into account what it will be like post divorce. Could you afford it? If you can, great, crack on. If you can’t, we probably need to go back a few steps.
How does divorce affect my credit rating and ability to secure a mortgage in the future?
Your ability to get a mortgage comes back to affordability. Divorce shouldn’t really affect your credit rating unless you start missing payments or things fall into dispute.
Sadly, an overwhelming majority of clients with past credit issues have faced problems after a messy breakup. So I appreciate it’s not always easy. Everyone knows the horror stories – you don’t need to look far to find many examples, so ideally if you can split amicably that’s great. But this is the real world, where humans are very emotional. One partner can stop paying bills to spite the other person.
But lenders live in the real world too. I helped someone with quite serious credit issues in the tens of thousands, and on the credit file there was a three to six month period where it was really messy due to a divorce. Since, it was absolutely fine, and we got a high street lender on board.
Credit is not a problem forever. It’s like your driving licence – sometimes you get points and they drop off after time, and your credit file is exactly the same. The longer ago the issue, the smaller it was, the less problems you’ll have.
What fees and charges are involved in restructuring or refinancing a mortgage during divorce?
It depends. If you have to sell your property and you’re tied into your mortgage, you might have quite a large early redemption penalty. Look at the mortgage offer or at your online account and see what the situation is.
You might also be charged a penalty if you refinance. Perhaps your existing bank won’t offer you the money you need and you need to move to a new lender. Again you might have to pay an exit penalty. On a variable rate or a penalty-free product that may not apply. But that’s often why we try to work with a bank with a further advance, because it mitigates those penalties.
Aside from penalties, if you’re refinancing there might be a survey fee, there might be an arrangement fee, then the interest rate you’ll be charged would be relevant to your situation, including the deposit etc. The underlying mortgage is the same but it’s the way in and the way out that are the big things, particularly around exit penalties.
What criteria do mortgage lenders use to assess eligibility during divorce?
If you’re looking at doing a more traditional mortgage, we have a range of wonderful podcasts, whether you are employed, self-employed, a company director etc. So rather than get into specifics of how it’s assessed, look for those podcasts on our website.
That said, most banks will give you 4.5 times your income and some will go up to 5.5 times. If you’re in those parameters with your income you should be okay. If there is a maintenance agreement in place, some banks will take that into account.
Of the banks that do, some like to see that you’re earning separately and they’ll include the maintenance income. Some factor it in at just one times. For example, if you got £50,000 a year then that’s one times your income. Some banks factor it in fully – so if you’ve got £100,000 maintenance you could borrow four to five times that. Some banks will take the maintenance agreement just on its own, but there are fewer of those.
You might need to structure the mortgage to fall in line with the agreement. Say your child is 8 and the maintenance agreement runs until they are 18, a bank might give you a 10 year mortgage rather than work up to retirement age.
A court order or formal maintenance agreement is easier to assess than something informal. But if you can get something written down that’s legally binding we can generally work with it.
What else do we need to consider with divorce mortgages?
One thing I would say is to be really careful that you know what outcome you want from the start. We try to work with your lender where possible, especially where there are penalties.
This is complicated. Lender assessment around this is difficult because we have to look at future affordability, not just current. Agreements will be factored in, whether you’re paying or receiving it. It’s important to talk to a broker as soon as possible.
We know the banks who are good at this and the ones that aren’t. It’s a difficult time so we don’t want you to have another headache. We want to make this as smooth as possible so you can move on to whatever you do next, cleanly and painlessly.