When joint owners split
Breaking up can make it difficult to get another mortgage. We look at the solutions now available.
The breakdown of a long-term relationship or marriage is possibly one of the hardest things you’ll ever have to endure. As well as the emotional pain and upheaval, it’s also likely that there will be considerable financial implications for both parties as you attempt to move on.
According to research from Social Trends, which collates information from various government departments, there were 340,000 divorces in the UK in 2003, a proportion of which would have needed to buy a new home. The same issues also affect co-habiting couples. Interestingly though, few mortgage providers offer products that address the problems faced by home buyers after a relationship breakdown.
However, lenders are becoming more flexible and as a result more solutions are now available.
In cases where one parent has custody of any children, maintenance payments from their ex-partner or spouse are often the only way to pay the mortgage. However, many lenders won’t accept maintenance as a form of income unless it’s been organized through the courts. This is particularly a problem for unmarried couples who don’t need to go to court to separate.
“Although couples are encouraged to organize their problems without going through the courts, they stand to suffer when it comes to getting a new mortgage,” explains Ray Boulger of mortgage broker John Charcol. “A lender needs to be confident that the mortgage will be paid, and if the agreement is only voluntary it’s not seen as reliable.”
This will also affect the party paying maintenance. If a lender isn’t satisfied that the agreement will be honoured, the maintenance provider must remain on the property’s mortgage. If a second mortgage is applied for any existing arrangement will be taken into consideration and will often reduce the amount available to borrow.
One lender attempting to tackle the problem is Yorkshire Building Society. Its new Fresh Start mortgage is aimed at divorcees and separated couples. Unlike other lenders Yorkshire Building Society includes Child and Working Tax Credits and maintenance payments without a court order when calculating income multiples.
“We did some research and found that the party raising the children often relies on maintenance payments for the bulk of their income,” explains Tanya Jackson of Yorkshire Building Society. “Most lenders want a court order or evidence of three consecutive payments before they’ll offer a mortgage, but all we require is a solicitor’s letter.”
The product offers 0% interest for the first six months and is available at a five-year fixed rate of 5.09% with a maximum loan-to-value (LTV) of 95% or 5.49% for 100% LTV. A tracker at 1.5% above the Bank of England base rate is also available if you’re borrowing up to 100% LTV. There is an early repayment charge for any excess repayments made during the deal period.
Although there are more competitively priced products available, Fresh Start’s interest free period helps keep monthly payments low at the beginning. “Dividing one house into two creates a lot of expense, so we wanted to help customers when they need it most,” explains Tanya Jackson.
In comparison, the current best buys are Mercantile, which has a 4.45% five-year fixed-rate mortgage for up to 75% LTV, and Scottish Widows Bank’s 5.29% five-year fixed-rate mortgage, available for up to 110% LTV.
There are few 100% products aimed at helping home buyers without a deposit and fewer of these are suitable for people relying on amicably agreed maintenance. “If you receive maintenance through the courts and don’t want more to borrow more than 75% of the property’s value there are many deals available to divorcees,” says Ray Boulger. “However, where it gets difficult is if maintenance hasn’t been agreed through the courts and there’s no equity from the sale of the family home to use as a deposit.”
With Fresh Start, however, Yorkshire Building Society will lend up to 100% of the value of the property. “We conducted research to see if existing products suited the needs of separated couples and found that there was a large group of people who were left in the family home with the children,” says Tanya Jackson. “As the property hasn’t been sold they don’t have equity to use as a deposit, so they need a 100% mortgage.”
As the mortgage is for the property’s full value, the interest is slightly higher at 5.49% for the five-year fixed-rate deal. However, unlike many other mortgages there is no higher lending charge. Yorkshire Building Society will also pay £400 towards the cost of moving home and offers you a free professional advice service from independent counsellors.
Poor credit history
Due to the emotional upset caused by a relationship breakdown the financial repercussions of dividing a home are often hard to face. As a result, many couples find that household bills are not paid either intentionally by one party, or by mistake.
“People either prioritize their emotional problems over the financial implications or will use financial discussions as a way of prolonging the argument,” explains Imogen Clout, author of Which? Divorce. “As couples don’t often have the opportunity to argue about the cause of the relationship’s breakdown, they will project the unhappy feelings from the marriage onto the financial aspects to punish each other.”
Also, as household finances tend to be organized by one party, bills will often fall into arrears as the person left in charge may be unfamiliar with the responsibility. As a result, many couples find that their credit rating has been negatively affected, making it harder to obtain a mortgage. As credit scores are calculated by address rather than a person’s name, this affects both parties regardless of who is to blame.
However, there are lenders who will lend to people with a poor credit history. Accord Mortgages, for example, specialises in lending to people affected by county court judgements, bankruptcy and repossessions. “There are five different levels of credit adversity and the LTV available will depend on the credit rating of the applicant,” explains Rob Watson of Accord Mortgages. “However, we do accept maintenance payments with a solicitor’s letter as proof.”
As Accord Mortgages only offers the highest LTV to customers with slight credit problems, the products are only suitable for people with a deposit. However, if you make every payment on time during the special deal period your credit score will be improved and you’ll be eligible to transfer to one of its prime credit products with lower interest.
Although there are many extra benefits with specialist products, it’s still important to do your research and find the best deal for you. While a mortgage may have a low introductory rate, it may cost you more in the long run than other seemingly more expensive deals. As with choosing a mortgage at any other time, the most important consideration is whether a deal suits your circumstances and your individual and financial needs. As long as you bear this in mind, it could be the start of a new happier life.
Story from Mortgage Adviser Magazine