In the current cost of living crisis, divorcing couples are facing increasingly difficult choices regarding their living arrangements. As a result of higher inflation, mortgage rates are increasing, making mortgages less affordable and leaving separating spouses with a reduced borrowing capacity. The volatility of the housing market is also causing properties to take longer to sell, sometimes for much less than the desired price. This can mean that there is less capital available to rehouse and a reduced ability to afford a new mortgage.
So how is the increase in mortgage rates affecting divorcing couples?
Retaining the family home to keep the fixed interest rate
The increase in mortgage rates is impacting divorcing couples who might be hoping they could remain in the family home, with their children for example. Higher interest rates mean higher monthly repayments, and so if the current mortgage deal is coming to an end, the new mortgage rate may be too expensive for one spouse on their own and therefore make a deferred sale unaffordable.
Selling the family home and obtaining a new mortgage
If a spouse is unable to afford to pay the mortgage on the family home on their own, it may be that the only viable option is to sell the property and divide the sale proceeds. However, the issue will remain as to whether the cost of a new mortgage is affordable in light of the rise in interest rates. We are seeing an increase in the number of people who are struggling to afford a new mortgage following a divorce and cannot afford to borrow enough to buy a suitable new property.
Judges in the family courts are aware of the difficulties spouses are facing when it comes to rehousing and are increasingly willing to consider the possible need for either or both parties to rent in order to meet their immediate housing needs following a sale of the family home. Due to the costs of renting, parties will inevitably face much uncertainty as to when they may be able to get back onto the housing ladder. Further, there is also a lot of competition for good rental properties.
Porting the existing mortgage
There are an increasing number of divorcing couples placing greater importance on who is able to retain the current, more favourable mortgage rate or have the benefit of porting this to a new property.
As current rates are at an average of 6.34% for a five-year fixed deal (according to Moneyfacts), holding onto a lower rate, in some cases significantly lower, could save a significant amount.
It might be possible to share a joint mortgage and the existing lower rate, to allow both parties to benefit from this, but this will depend on whether it is permitted by the lender. Advice from your mortgage company or broker will be required.
If parties cannot agree what is to happen to the current mortgage, a court application will need to be made and the judge will have to decide. It may be decided that the party with the lower income should have the benefit of the lower rate, making it more affordable for them to rehouse.
The rise in mortgage rates may be used as leverage by some parties in financial negotiations. Mortgages in joint names will require both parties’ consent to remortgage. One party may refuse to sign a new mortgage offer, meaning the mortgage could be stuck on a more expensive standard variable rate, to encourage negotiation on other aspects of the financial settlement.
Payment of the mortgage during a divorce
It is important to consider how the mortgage is going to be paid whilst negotiations are ongoing. If the mortgage is in joint names, both parties will be jointly and severally liable, meaning they are both under a legal obligation to pay it whether or not they are living at the property.
In light of the current property market, even where it is agreed that a property should be sold, the property may take some time for a sale to complete. It is therefore important to reach an agreement at the earliest opportunity so that there is certainty about how the mortgage will be paid in the short term.
Any missed payments will impact both parties’ credit scores, which will in turn limit their ability to borrow money in the future. If it is anticipated that mortgage payments will be missed, it is advisable to discuss this with the lender as soon as possible as there may be options, such as payment holidays or switching to interest-only payments, that can be considered.
Rushing or delaying a divorce
On the one hand, some couples are reaching a settlement more quickly, in order to sell a property sooner and try to avoid the risk of rates increasing further by the time they take out a new mortgage.
Other couples are instead delaying or avoiding separating at all in the current financial climate. Couples who may lack the financial resources to purchase a property or take on a mortgage can feel they have little choice but to continue living together until rates have reduced.
By taking legal advice at an early stage, your solicitor will advise you on the options available to you and provide guidance as to how you might best resolve these matters as part of any financial settlement on divorce.