With interest rates, the cost-of-living crisis and a general election in the headlines on a daily basis, mortgage affordability is a key concern for many homeowners, not least for couples who are separating and wondering how this will affect their mortgage arrangements.
Most divorcing couples will have a mortgage on their family home, and the family home is likely to be their largest asset. The mortgage may be in joint names, or it could be in one person’s sole name. Either way, the house will be considered a matrimonial asset if it is the family home, and it will need to be dealt with as part of the financial settlement.
Whether a mortgage is affected by divorce or the dissolution of a civil partnership, and the extent to which it is affected, will depend on the terms of the financial settlement or any court order.
‘Most couples prefer to negotiate a clean financial break so that they have no ongoing financial ties, but if you have a joint mortgage then you and your partner will be both jointly and severally liable for that mortgage until it is either repaid or transferred into one person’s sole name,’ says Manda Toms, Partner in the family team at Cornish firm Nalders based in Truro.
There are typically three ways in which a former matrimonial home will be dealt with when a marriage or civil partnership ends, each with respective arrangements for the mortgage. Some couples may also need to take additional steps if their home is in a position of negative equity.
The three common routes are:
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- Selling the former matrimonial home – If you decide to sell your home as part of your divorce, then typically an estate agent will be jointly appointed by you both to achieve the best sale price. Once the sale is agreed, the solicitor acting for you will obtain a redemption statement from the mortgage company to find out how much money is left to pay. Once the sale completes, the solicitor will redeem the mortgage in full so that neither of you have any further liability or obligation to the mortgage company.
- If you keep the house – The first step will be to get the property valued, ideally by a qualified professional jointly appointed by you both to avoid any argument over the value. If you are the sole owner of the house and the mortgage is already in your sole name, you do not need to take any action in respect of it. Your divorce lawyer will be able to include terms in your settlement agreement to ensure that your former partner is foregoing any beneficial interest they have in your house.
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If your spouse or civil partner is the sole owner of the house, you will need to have the house transferred into your name. If you have to pay them a lump sum as part of your settlement, or if you have agreed to repay their mortgage on the house, then you may need to take out a mortgage in your sole name. Independent financial advice will be needed on the right option for you.
If the mortgage is in joint names, then you will either need to repay the mortgage and take out a new mortgage in your sole name, or, you will have to seek the agreement of your current mortgage company to release your partner from the mortgage and to transfer it into your sole name.
- If your spouse or civil partner keeps the house – Much like the above situation, the first step will be to obtain a valuation on the property. If you are not an owner, then you do not need to do anything, and your settlement terms will confirm that you are agreeing to forego any beneficial interest you have in the house.
If the house is in your sole name, then you must make arrangements to redeem your mortgage at or before it is transferred to your former partner. Your solicitor can arrange to do this as part of the transfer process.
If the mortgage is in joint names, then even if you do not reside in the house, you will still be jointly and severally liable for it. Until you are released from this liability, you may find it difficult to obtain a mortgage for any new house you wish to purchase. Therefore, when the house is being transferred to your former partner, your solicitor will make sure that you are released from all future obligations to the mortgage company, either by obtaining the mortgage company’s consent to release you, or, by making sure the mortgage has been redeemed.
What if the house is in negative equity?
Negative equity means that there is more money owed to the mortgage provider than the amount that the house has been valued at. If your house is in negative equity, then it is unlikely the mortgage company will release either of you from being responsible for the payment of the mortgage.
This means, if you sell the house, you or your partner will have to also raise a lump sum to be able to pay back the mortgage at the time of sale.
If either of you plan on keeping the house, then you could try and raise a lump sum to reduce the mortgage. This may provide more options to re-mortgage into one person’s sole name. Independent financial advice should be obtained to find the best mortgage options.
Alternatively, if neither of you are able to raise a lump sum to reduce the mortgage then an agreement may be entered to allow one of you to remain in the house and indemnify the other in respect of the mortgage payments. Such agreement would also normally provide for the person that is remaining in the house to be entitled to any future equity.
The options available in respect of negative equity properties are more limited, but we have a wealth of experience in reaching creative solutions to allow our clients the freedom to move on financially following divorce.
How we can help
One of our family law experts will be able to advise you on the options available to you in respect of your mortgage on divorce. We can weigh up the routes available to you, and help you obtain the right legal and financial advice to best meet your future needs.
Please contact Manda Toms in the family law team on 01872 241414 or email mbt@nalders.co.uk for further advice.
Nalders have offices throughout the county of Cornwall in Truro, St Austell, Newquay, Falmouth, Helston, Camborne and Penzance.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.