As interest rates continue to rise, with a typical five-year fixed mortgage deal now exceeding 6%, divorcing couples face a new negotiating point: keeping the low mortgage – either at the family home or by porting it to a new property.
Stowe Partner, Newcastle based Nicky Hunter, explains more about mortgages and divorce.
Who gets the mortgage?
In recent months, we’ve seen more clients argue about who should keep homes with mortgages taken out years ago, sometimes with mortgage rates as low as 2%, potentially saving one of them thousands of pounds.
This conflict causes costly delays in finalising divorce financial settlements in some cases, with couples who can’t reach an agreement ending up in family court.
The consecutive interest rate increases are adding to the financial pressures faced by separating couples, as they try to resolve their finances against a backdrop of spiralling costs and uncertainty in the ever-deepening economic uncertainty.
For divorcing couples, the immediate need is to work out how to divide their assets and use the family income to set up two homes from the same financial resources that in the past funded just one.
This can bring many challenges, but one of the most difficult, and now often most pressing, is how to deal with the existing mortgage and affordability of a new one.
Mortgages: the immediate issue
Because reaching a financial settlement can take months, it is vital to consider how the mortgage will be paid in the interim.
If the mortgage is in both names, you both continue to be legally responsible for paying for it, even if one has moved out and has other housing costs to meet, such as rent.
Maintaining payments may become difficult if the household income is now stretched to cover two homes. As a result, it is critical to reach an agreement on how the mortgage will be paid in the short term as soon as possible. Any missed monthly payments will have an impact on both of your credit scores, limiting future rental and borrowing opportunities.
If there is any risk of missing payments, you must speak to their mortgage lender as soon as possible to look at options, such as payment holidays, or switch to interest-only payments while the financial issues are resolved.
The division of assets in divorce
The legal starting point in a divorce is that the marital assets should be shared equally. However, if there is insufficient money in the ‘matrimonial pot’ for equal sharing to meet the basic needs of you, your ex-partner, and your children, this opens up scope to justify arguments for unequal division based on individual needs and differences in earning capacities.
Mortgages and divorce
Most couples’ first priority during divorce is housing, especially if they have children.
However, this can be one of the most difficult areas to resolve, and difficult decisions often need to be made about the family home.
Whether the house and mortgage are owned jointly or solely by you or your ex-partner, it is considered a matrimonial asset.
Mortgages are typically dealt with in three ways as part of a larger financial settlement:
Option 1. Sell the house, pay off the mortgage, and agree how to divide any equity
This common approach is often taken by amicable couples, especially if they have children, where two homes can be bought if both parties use a portion of the equity as a deposit to purchase their news homes.
As part of the financial settlement, the division of equity takes into account both parties’ borrowing capacity as well as any savings, to determine how much each person needs to be able to find suitable alternative accommodation.
Option 2. Keep the house and mortgage in joint names, agreeing it will be sold later
Because this option keeps couples financially tied together, potentially for years to come, it is usually considered when one parent is unable to obtain a mortgage or rehouse on their own. It allows the children to remain in the family home until they reach the age of school or university.
Sometimes referred to as birdnesting, divorcing parents sometimes choose this approach and split their time there equally while the children continue to live in the family home 100 per cent of the time.
Option 3. One couple buys out their ex-partner’s interest in the house, releasing their ex from the mortgage, and transfers ownership into their sole name.
Whether this is a viable option is dependent on whether one party can afford to take over the mortgage by themselves and fund the buy out of their ex-partner’s interest and whether the party continuing to live in the home can afford to run the home independently. Sometimes, couples negotiate on other assets, such as pensions, savings or investments, in order to keep the home, although legal and financial advice is critical here to avoid expensive mistakes.
A new dilemma for divorcing couples
Couples divorcing during this cost-of-living crisis face harder decisions about their mortgages and how to fund where they’ll live, amid ongoing financial uncertainty.
If your assets are insufficient to establish two separate homes, you may feel they have no alternative than to remain in the family home together until rates improve. But this can be challenging, particularly if there are abusive behaviours, and parents should consider the impact of arguments and an unhappy home environment on their children.
Still, being able to afford two properties from the matrimonial pot is no guarantee. You may find your options dramatically reduced, with mortgages less affordable, and borrowing capacities squeezed.
Houses which you may have considered 12 months ago may no longer be an affordable option. Especially, when you factor in sky-high utilities and food costs.
As interest rates look set to continue to rise, there is now an increased urgency to resolve any issues as quickly as possible before mortgages go up again, which could result in mortgage offers being withdrawn.
Low-rate mortgages have become a new focal point of dispute, as couples argue who gets to keep it – whether on the current property or a new one – as paying off a loan at 1.5% will save thousands of pounds compared to the new one at 6 or even 7%.
What if you and your ex can’t agree?
If you and your ex-partner can’t agree what should happen to the family home, there are several options available.
For example, negotiation through solicitors, mediation, collaborative law and arbitration. However, if these aren’t viable, or prove to be unsuccessful, there is the option to apply to the family court to let a judge decide.
If the court has to make the decide on yours and your ex-partner’s behalf, it will look at a range of factors to make an informed decision. These include, the individual needs of each party and any children, the available ‘pot’ of combined financial resources, and apply a checklist of considerations, such as the length of the marriage, the health of each party, and the standard of living during the marriage.
Based on this information, the judge will decide what is the fairest division of the assets in each case.
The judge may decide that the more financially vulnerable party, typically the party who earns the least, should be allowed to keep the existing home with the benefit of the better mortgage rate, because it’s more affordable for them. Or they could determine the house should be sold, because even though one party who wants to keep the house can afford to take on the current mortgage, they can’t afford to increase their borrowing further to release the required equity in the home as a deposit for the other party.
If there are young children involved, the law requires the courts to first consider how they will be housed following their parents’ divorce. And while there is no legal presumption that both parents should live in a house they own, if the assets are available, it may be considered unfair for them not to be shared in a way that allows both parties to live in a home they own if they wish.
Going to court is certainly a riskier option, that takes the decision out of your control and means no certain outcome can be guaranteed. And, while timing is a key consideration, the lengthy backlogs in the family court system can substantially delay a final settlement, prolonging the uncertainty. By the time the case has been heard and a decision reached, the mortgage and housing markets could be in a very different place.
Looking to the future
Continuing uncertainty around interest rates, mortgage affordability and the wider housing market is creating a new financial reality for divorcing couples, making it far more challenging for divorcing couples to reach financial agreements and move on with their lives.
Now, more than ever, as couples navigate divorce against the backdrop of a mortgage and cost-of-icing crisis, seeking professional advice and support is vital to ensure that you can achieve a fair outcome and move forward from a position of strength.
Related links
Can I afford to divorce my partner?
A money life coach’s guide to budgeting after divorce
Taking control of finances – guidance from an IFA
Stowe talks podcast – Taking control of your finances on separation and beyond with Lottie Kent
Get in touch
For more advice about mortgages and divorce please do get in touch with our Client Care Team using the details below or make an online enquiry.
