What Happens to the Mortgage in a Divorce?
What Happens to My Mortgage in a Divorce?
With a typical mortgage deal currently exceeding 6%, managing a mortgage in a divorce can be complex matter, requiring the help of an expert solicitor. With the recent changes to mortgages couples will need to negotiate who keeps the ‘low-rate mortgage.’ If the family home gets sold, a solicitor can aid both parties in reaching a fair division of assets.
Who Gets the Mortgage in a Divorce?
For many couples, the mortgage will have been taken out years ago when the rates were as low as 1.5%. Therefore, the party that remains in the family home gets the benefit of saving significant money. On the other hand, the party not in the family home has to face buying a property in a time where interest rates are exceeding 6% and some properties require a 40% deposit. For many individuals, especially if managing a mortgage alone, this option is not affordable.
Due to the complexity of reaching an agreement regarding mortgages, financial settlements are seeing increasing delays. Furthermore, couples who are unable to reach an agreement are having to resort to the Family Court. This not only is a more expensive route but also adds to the large backlog of cases the Courts processing.
For couples looking to divorce, it’s vital to place priority on dividing assets and using family incomes to set up two homes from the same ‘financial pot’ that was previously used for the one household.
Settling How the Mortgage Will Be Paid
When separating from your partner, it’s vital to arrange how the mortgage will be paid in the period before you reach settlement. Because it can take a while to come to a settlement it’s important to make sure that you make mortgage repayments in the meantime. Even if one party has moved out of the house, if the mortgage is in both names, both parties will need to contribute. However, in this situation, it can be difficult to make payments, especially if the household income is covering two homes. This is why it’s crucial to find a short-term solution. Missing a monthly repayment can negatively impact the credit score for both parties, limiting access to future credit.
If you believe a future mortgage repayment is going to be missed, speak to a mortgage advisor as soon as possible. Your mortgage advisor will be able to provide alternative solutions such as including a payment holiday or a temporary switch to interest only repayments.
The Options for Managing a Mortgage in a Divorce
Following a divorce, sorting out the house is often the top priority, especially where there are children involved. Whether the family home is jointly, or solely owned, it is considered a marital asset. This means that it is usually dealt with as part of a larger financial settlement. Therefore, during a divorce, the mortgage is often settled one of the following ways:
1. An agreement is made on how to divide equity to pay off the mortgage once the house is sold.
For couples who come to an agreement easily, and often where children are involved, this agreement is popular. This agreement helps both parties purchase a home if they each use a portion of the equity from the house sale as a deposit.
The financial settlement considers how much equity each party receives, by taking into account how much each individual can borrow and the amount of savings they have. This helps to fairly calculate how much each party needs to find suitable accommodation.
2. Keep the mortgage in joint names and sell the house at a later point.
This agreement is often advantageous when children are involved, especially if one party is unable to get a mortgage to rehouse on their own. This arrangement allows children to remain in their family home until they reach school or university age. However, it keeps both parties financially tied, sometimes for long periods of time.
In some cases, parents will take an approach called ‘birdnesting’ where each party will take their turn staying in the family home, while the child remains there all the time.
3. One party buys out the other party.
If one party wants to stay in the family home, an option is to buy out the other party’s share of the mortgage. As a result, one party will be the sole owner of the property and mortgage. It’s possible to also negotiate other assets such as a pension, savings, or investments to keep the family home. However, it’s important to seek financial advice before perusing this option.
What If An Agreement Can’t Be Reached?
If you and your partner cannot agree on what should happen with the family home, a family law solicitor can help. Options such as mediation, collaborative law, and arbitration can help separating couples reach an agreement. However, if those options do not work, parties can apply to the family court to let a judge decide.
The court will look at several factors when making an informed judgement. These include:
- the unique needs of each party and any children involved.
- the combined financial resourced available for distribution.
- The duration of the marriage.
- The health of the parties.
- The standard of living during marriage.
Once these factors have been assessed the judge will determine a fair division of assets.
The judge may decide that the financially vulnerable party, should retain the current home. In most cases, this will have a more favourable mortgage rate making it more affordable for them. Alternatively, the judge might rule that the house should be sold. This decision could be because while one party desiring to keep the house can manage the existing mortgage, they cannot afford to take on more debt to release the necessary equity in the home as a deposit for the other party.
Factoring in Children When Managing Mortgages in a Divorce
In cases with young children, the law ensures the court must prioritise where the children will live after the divorce. Although there is no legal presumption that both parents should live in a joint-owned property, fairness states that if couples’ assets allow for it, both parties should have the opportunity to live in a home they own if they desire.
Going to court is undoubtedly a riskier option, as it takes the decision-making process out of your hands. Furthermore, there’s no guarantee of a specific outcome. Additionally, lengthy backlogs in the family court system can substantially delay the final settlement, prolonging the uncertainty. By the time the case is heard, and a decision is reached, the mortgage and housing markets may have changed.
How Higher Interest Rates are Impacting Mortgages in a Divorce
During the cost-of-living crisis, new problems are faced by divorcing couples regarding their joint mortgages. Problems can range from where each party will live to how to fairly negotiate the mortgage amongst changing interest rates.
Selling the family home no longer guarantees enough money in the ‘matrimonial pot’ for two properties. This is because borrowing capacities are reduced and mortgages are less affordable. As a result, separated couples may be forced into living under the same roof. Where abuse has been present, living together provides an unsafe environment for victim parties and for any children involved.
An expert divorce solicitor can help you negotiate your mortgage in a way that is fair to both parties.
Getting Legal Advice
All advice is correct at time of publication.