Research by the Office for National Statistics (ONS) shows divorce is sadly increasing in Britain. At a time when many are dealing with the health and financial impact of Covid-19, it is a trend that’s likely to continue.
According to an article in the Financial Times earlier this year, solicitors Russell & Russell said it expected a rise in divorce cases due to the “hardship of the preceding year”.
Statistics from the ONS also show that, in 2019, the average duration of a marriage at divorce was slightly more than 12 years – which means divorcing couples will often still be paying a mortgage.
So, what are your responsibilities to your lender during your divorce, and how likely is it you will be able to secure a new mortgage in the future?
The good news is that there are lenders who can help. Read on to discover how best to deal with your lender during a separation and divorce, and how you could increase your chances of securing a mortgage as a divorcee.
If you move out of the marital home, keep paying the mortgage
If you and your spouse took out a joint mortgage, you are both equally liable for the debt, even if one of you leaves the marital home.
While you may come to a personal arrangement, you must ensure you both meet your mortgage repayment obligations.
Failure to do this may result in the lender pursuing you for the mortgage and will negatively impact on your credit history. In turn, this will adversely affect your ability to get a mortgage in future.
Keeping a close eye on repayments and budgeting carefully will help ensure mortgage repayments continue to be met and protect your credit score going forward.
Always keep your lender informed and up to date
As soon as you and your spouse separate, let your mortgage lender know.
Banks are likely to be sympathetic towards your situation as regulation means the lender has to act in a way that is fair and sympathetic. For example, it may put in place a “payment holiday” to help with any additional financial stresses you are experiencing.
Contacting the lender as early as possible will start a positive conversation and provide them with peace of mind that you are in control of the situation.
Selling your property protects your credit history
Selling your marital home and repaying the mortgage could be the most effective way of protecting your credit history and securing a future mortgage.
If you do sell the house, you will need to obtain a current value to determine the level of equity in the property.
Once the house is sold and equity released to both parties, you may be tempted to buy a much-deserved dream car or go on the holiday of a lifetime.
However, think carefully, as using the money to put a bigger deposit on a house will:
- Increase the chances of your mortgage application being accepted
- Secure a lower interest rate, which means you’ll pay less money over the term of the mortgage.
Bigger deposits increase your chances of a mortgage
When you take out a mortgage, the lower the mortgage you can take against the value of the property, the better. Or, put another way, the more deposit you put down, the better.
This is because lenders use a “loan-to-value” (LTV) ratio, which is the amount of the property’s total value that is taken as a mortgage.
Therefore, a 95% mortgage is 95% of the property’s value, and an 80% mortgage is 80% of the home’s value. This is important for two reasons:
- The higher the ratio, the higher the interest rate you are likely to be charged. This means the higher the LTV the more you will likely pay back over the life of the mortgage. Typically, the lower the LTV, the less you will pay.
- The lower the LTV, the more chance you have of having your application approved, as it represents less risk to the lender. This is because it is easier to recover a smaller loan against a house if it is repossessed.
Lenders assessing a mortgage application will also “stress test” your ability to afford repayments if interest rates rise. Again, the lower the LTV, the less likely it is that this will be an issue.
You may be able to take over your existing mortgage
You may decide to take over the existing mortgage, and while the bank doesn’t have any obligation to remove an ex-spouse from the mortgage, it may be willing to allow you to do so if you can demonstrate an ability to meet repayments by yourself.
Alternatively, you could apply to remortgage the house to buy the ex-spouse’s share.
Child maintenance may be seen as income
If your child maintenance was awarded by a court order, a lender may accept it as a source of income. Speak with a professional adviser as different lenders will treat it differently.
Where maintenance is informal but paid regularly, it may be possible to find a lender who can use this as income. Again, speak with a professional who is likely to know the lenders that will consider informal maintenance agreements.
State benefits could also be accepted as income
As a lender’s biggest concern is the amount of income and how stable it is, a number of government benefits may be accepted as income.
Benefits that may be taken as income alongside your earnings include: Carers Allowance, Child Benefit, Child Tax Credit and Disability Living Allowance (DLA). Again, professional advice should be taken to help guide you through this complicated area.
Get in touch
If you would like to discuss applying for a mortgage during or immediately after a divorce, please call us on 0116 262 1414.
At Finance Lab we help you achieve financial peace of mind for yourself and their family, whether that’s meeting a financial goal, building an emergency fund or protecting the family’s future.
Please note
This article is for information only. Please do not act based on anything you might read in this article until you have sought professional advice.
Production