Equity Release, Mortgages, Divorce and Separation
Relationships break down, even those that appear to have been solid for decades.
Divorce and separation in later life often requires capital to fund a settlement to a spouse or partner. Money might be needed for somewhere to live and there is often insufficient income to pay rent or support a mortgage.
How can equity release help?
Divorce in Later Life
Divorce and separation have led to some recent enquiries for lifetime mortgages.
It prompted me to look at the Office of National Statistics to see how many people might be affected by divorce in later life.
Figures from 2019, the most recent available, show there were 107, 599 divorces in England and Wales. For opposite-sex couples, around 16,000 men over age 55 were divorced and more than 8,000 of these were over age 60.
A total of around 11,000 women over age 55 were divorced, of which more than 6,000 were over age 60. There were also a handful of same-sex marriage divorces with people in the same age ranges. I couldn’t find any figures for separations.
How can Lifetime Mortgages Help?
A lifetime mortgage can be used in a couple of ways. The first is to raise a lump sum to help one party buy out the share of a co-owner. This allows them to keep a property whilst completing a clean break.
Alternatively, a lifetime mortgage can be used by somebody with a decent deposit to buy a new home and avoid renting or having to seek help from the family.
Equity release may not be the whole answer. The rate of interest depends on the percentage of the property borrowed and the age of the borrower. Some people won’t worry that a high rate of interest may lead to erosion of the equity available to beneficiaries. Others may prefer to take a more cautious approach to protect the amount they can pass on to the next generation.
For example, think about a lifetime mortgage with an interest rate of 4% compound for borrowing 50% of the property. If the market price of the house increases by 2% every year, the amount of equity available to pass on to the next generation will stay approximately the same.
Buying Out Your Partner
Let’s think about a situation where one person wants to keep the family home.
Dave and Sandra are both 70 and have a house worth £300,000. They also have savings of £80,000 which gives joint assets of £380,000 or £190,000 each. Sandra hopes to keep the house and Dave has agreed provided he can have £150,000 in cash.
Sandra consults an adviser to discover that the maximum she can borrow at age 70 is £141,000 when she needs £150,000. To add to the difficulty, the interest rate is 6.32% and she is concerned this will significantly reduce the amount she can leave in her will.
To make things work, Sandra chooses to borrow £125,000 using a lifetime mortgage which is available at 4.06%. The rate is more manageable and is likely to leave her with the option to withdraw additional equity in future if she needs it. She uses £25,000 from her half of the savings to make up the difference.
If Sandra had been 73 she could have borrowed the entire £150,000 but at the higher rate, and at age 76 the amount of £150,000 would required interest at 4.74%. Don’t forget that both Sandra and Dave would have legal costs and other fees as part of the process.
Selling the house and splitting the proceeds
Sometimes there is no option other than to sell the property. If Sandra and Dave each received £150,000 this amount could be used as a deposit and a lifetime mortgage used to complete the purchase.
For example, using the same loan to value calculation as above, each of them could borrow approximately a further £125,000 to purchase a property worth £275,000 or much less if they are happy to downsize - not a terrible idea as we get older.
Divorce, Separation and Legal Advice
Some lenders will want to have certainty that the couple has made a clean break. They will not want to lend money secured on a property if the person who receives it might return later with a legal demand for an additional settlement.
Where applicants are raising money from property as part of a divorce, lenders are likely to require a Full and Final Settlement Order which has been ratified by the court.
The person being removed from ownership would normally have already left the property, but at the very latest, they must move out when the mortgage completes. There may be other requirements such as a legally executed Deed of Consent.
If the house is being dealt with before divorce, lenders may require a Deed of Separation regardless of how long the couple have been separated. This must not contain a clause that allows the agreement to be breached if the couple reconciles. Each of the parties must have obtained personal and independent legal advice.
This is always going to be a sensitive and difficult situation with significant costs for everyone concerned. If a lifetime mortgage might be part of the solution, for capital raising or house purchase, it is worth contacting an adviser early.
They can tell you how much might be available and at what interest rates. They can also investigate the specific requirements of particular lifetime mortgage lenders. Give us a call if we can help.