‘Divorce mortgages’ hit the headlines in recent weeks as banks and mortgage lenders put forward ideas for new ways a divorcing couple may be able to borrow money to “buy-out” the other and hold on to the family home themselves. A so called “divorce mortgage” is an innovative idea on how lenders might package their products with repayment being made at the end of the term instead of in monthly instalments. How much interest would be charged is yet unknown.
How to keep the family home on divorce
Looking at ways one spouse can remain living in the family home, most likely with the children of the family, is not a new idea to family lawyers. When acting for a wife or husband in a divorce situation, considering their housing needs and those of their spouse and children after divorce is always a priority. If both parties are in agreement to sell the property then the issue is more about the share they each receive from the net equity to use to rehouse elsewhere. However, if one spouse does not want to sell because they want to remain living at the same home, or selling the property would not produce enough net equity to assist either spouse to rehouse, then keeping the property becomes a priority.
In an ideal world the spouse staying in the property would simply take on the existing mortgage and borrow an additional amount to “buy-out” the other spouse’s share of the net equity. When buying a home, most couples base their mortgage affordability on their joint income, so to buy out one spouse and take on the existing or an even larger mortgage on one spouse’s salary alone is rarely possible; especially as that spouse may now not be working due to having a young family.
Court intervention in family housing on divorce
There are ways a court can resolve this issue and meet the immediate needs to house the family without additional borrowing. In some cases, where that spouse does not satisfy the criteria of the mortgage lender to take on the mortgage in their sole name, subject to agreement of the mortgage lender, the house will transfer to one spouse but with the mortgage remaining in joint names. The leaving spouse will still want to receive their share of the equity that remains in the family home and this will need to be dealt with too.
The starting point for dividing the equity and all other assets arising from a marriage is 50/50. However, this is rarely ever the final outcome as one party may have more need for capital than the other especially if they have very different income capacities. The leaving spouse could be awarded a share of the equity but payment deferred until say the children are 18. The leaving spouse would register a legal charge against the property so as to protect their interest but without continuing to be a legal owner of the property. This scenario gives stability and a home for the children of the family whilst recognising the leaving spouse is still to receive a share of the equity, albeit at a later date. Alternatively, the leaving spouse may retain another asset entirely instead of a share of the net equity i.e. a pension. This idea of “off-set” works well when other assets are equally valuable and in many cases clients are surprised to learn their pensions are as valuable as the property itself.
It is good news that lenders are looking at ways to help families who are divorcing to retain their homes, especially in a financial market that is much tougher than it was a few years ago. The new idea, if a lender chooses to bring the product to the open market, may be the ideal solution for some clients but there are many other options.
Before taking on any new mortgage or lending clients would need the benefit of advice from a family lawyer so they understand what other options might be available to them but also independent financial advice to be sure the new product meets their needs now and in the future.
Divorce & family lawyer, St Neots