Dealing with a mortgage after divorce
As divorce rates are rising, now at 40 per cent, and the credit crunch takes over, dealing with mortgages through a split can feel like a daunting task.
The fact that no two situations are the same adds a further layer of complexity.
Luckily, there are many experts in mortgage who can help shed light on the subject.
Kelly Gilblom explores some of the ways to handle a mortgage during divorce.
Keeping the home
After divorce, one party often wants to retain ownership of the home that was lived in during marriage, especially if children are involved.
If this decision is made, several options materialise. First, one person's name can be removed from the mortgage completely, without remortgaging.
A large determinant in the handling of the situation is in the details of the deed. In the case of "joint tenancy" agreement the property is split 50/50 amongst the two parties involved. Or, 33/33/33 with three parties, etc.
To remove one borrower from the mortgage is a question of fund availability.
"You can approach the existing lender and buy out the other party. What's important is that you have income to cover the loan," says mortgage expert Craig Taggart at Baigrie Davies.
Because the lender is under no obligation to remove a party from the deed, the remaining party must show they can afford the repayments through a mandatory valuation process.
It's prudent to learn how ability to pay is determined by individual lenders as maintenance payments and tax credits are not always considered a part of income.
And, if a new co-signer is added to the mortgage to replace the old one, that will change the lender's evaluation of ability to pay.
Remaining in the property has added benefits. It can be better for children who are coping to the change and homes can carry a great deal of emotional attachment. Financially, there is an added bonus of not having to pay stamp tax.
In the event of a divorce stamp duty would not apply, the stamp duty issue would only apply in the event of non married couples splitting up.
In addition the stamp duty relates to the amount of mortgage and not the value of the property, for example if the mortgage was up to £350,000 then no stamp duty would apply as 50 per cent of the mortgage is £175,000 which is the top of the nil rate band, over £350,000 mortgage and you could end up paying stamp on 50 per cent of the mortgage, Mr Taggart explained.
In addition, there may be a £200 charge for an admin fees from the lender to cover solicitors costs/fees.
Costs add up when mediators, solicitors, financial advisers, lawyers and other fees are brought into the picture. Though expensive, they can often save time and heartache as well as prove to be preventative measure against future financial instability.
"To figure out who's getting what lawyers almost always need to get involved. The downside to that is there are costs involved," says Mr Taggart.
Of course, remortgaging completely is always an option. This may save time and money, especially the mortgage is free of any early repayment fees.
"Assuming the party who wants to keep the property has the income, it's pretty simple."
However, matters can be complicated when a court divides up property. Mortgages are not automatically split down the middle.
A home may have had changed its value if a great deal of work was done to it, if it underwent damages, market cycles and endless other possibilities. The court looks at all of these things.
They have far-reaching powers and may come up with creative agreements.
Mr Taggart says for example if a wife didn't work but took care of the children, the husband may be ordered to pay to keep her in the home until the children turn 18 at which point she becomes financially responsible.
In these instances both parties may stay on the mortgage deed as either joint owners or as "tenants in common"- a term used when each owner has a set percentage of the property, most frequently used when owners put in different financial amounts.
Also, in the case that the home is in negative equity- which occurs when mortgage payments surpass the value of the property- both parties may remain in the house to save money.
He concluded: "The other option is to sell."
Selling the house
Selling the house may be the best option if neither party can afford the mortgage alone. There are many other logistical and emotional factors that lead to the decision to sell as well.
"If that's the case, it's best to talk to a solicitor," says Mr Taggart.
Applying for a new mortgage
Buying a new home can be a complicated process after divorce. It may be the case one party is financially independent without having ever brought in a salary.
"The first thing you need to do would be to speak to an adviser," says Mr Taggart.
Because applying for a mortgage is a process that changes case-by-case, getting proper advice is a crucial element.
The first thing an adviser will tell is unless your name is no longer on the previous mortgage deed; you are still responsible for payments. Missing just one payment can wreak havoc on your credit score.
Certain lenders have loans built simply for divorcees. Yorkshire Building Society offers a Fresh Start range to those trying to rebuild their lives after a major change.
What mainly decides what kind of loan a potential borrower receives is income. Often, child tax credits and other government handouts are not factored in.
"What they use to determine income is your salary. Also, in some cases if one partner is paying maintenance, that may be considered as income," added Mr Taggart.
Loans are usually limited at three times a single income and less for joint incomes.
If repayments may potentially be a problem, a guarantor can be used. Usually a relative or close friend, this person will automatically resume repayments on the mortgage loan if the original borrower finds he or she has an inability to pay.
The lender can legally go through proceedings against the guarantor to recover debt. This is a serious commitment not to be entered into lightly.
Ultimately, mortgages are personal.
"There are no hard and fast rules. It's really on a case-by-case basis. What determines what happens are your individual circumstances."
What can help
. Appealing to lenders from the beginning. They can be sympathetic and even consider a payment holiday.
. Keep a copy of your credit report to note changes.
. Draw up your budget to show to a mortgage lender.
What can hurt
. Missing repayments can badly affect your credit score. Just because you have moved out doesn't mean your credit score won't be hit if mortgage payments are missed.
. Making empty threats or trying to ruin your former partner's credit. These tactics generally backfire.
. Trying to go at it alone without the help of professionals who are experts on the subject can have seriously negative consequences.
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