Forget the dog and the designer handbags—there’s a new battleground for divorcing couples to negotiate.
As mortgage rates continue to climb, couples are potentially facing tougher negotiations about who gets to hold onto the cheap mortgage – either at the family home or by porting it to a new property.
In the last few months, I’ve seen more and more clients argue about their historic fixed-rate mortgage, sometimes as low as 2%, in the financial settlement.
It’s reached the point that, in some cases, agreements have been delayed significantly, or the couple has gone into mediation to decide. For those unable to agree it has ended up in family court.
Working out how to divide their assets and use the income to build two homes from the same financial resources that were sustaining one has always been a challenge for divorcing spouses.
However, as the cost-of-living crisis continues, and interest rates continue to increase, the affordability of securing a new mortgage and/or managing the existing one is becoming a real challenge for couples.
The immediate concerns – how will the mortgage be paid during the divorce process?
It’s crucial to consider how the mortgage will be paid during the interim, as financial settlements can take many months to complete. Even if one of the parties has moved out and has other housing expenses, like rent, to pay, if the mortgage is in both names, both parties are still legally obligated to pay it.
Maintaining payments may be particularly challenging if the household income is now being strained to support two properties. Therefore, it is important to reach an agreement as soon as possible about how the mortgage will be paid in the short term.
Any missed payments will lower both spouses’ credit scores, which will limit their ability to rent and borrow money in the future.
People should contact their mortgage lender as soon as possible if they anticipate missing payments, to discuss options such as payment holidays or switching to interest-only.
Mortgages in divorce – what will happen to the family home?
Housing will typically be the top priority for most couples, especially if there are children in the family.
However, it can be one of the most difficult issues to overcome, and tough choices frequently need to be made regarding the family home. The home and mortgage, whether held in joint names or solely by one spouse, are regarded as marriage assets.
But rising interest rates have created a new challenge.
Divorcing couples today face more difficult choices regarding their mortgages and how to pay for their future living arrangements with their ex-partner.
Couples who lack the resources to buy or set up two separate homes may feel they have no choice but to live together in the family home until rates, hopefully, level off. However, this can be difficult, especially if the relationship is abusive, and parents must consider how fights and an unhappy home atmosphere affect their children.
Even those who can afford two homes from the pot still have drastically fewer options, with mortgages much less affordable, and borrowing capacities squeezed. Houses considered a year ago as an option by divorcing couples are often no longer viable, especially when you consider the exorbitant costs of utilities and food.
I am working with more clients than ever who have been desperate to stay in the family home, but had to accept selling it because they could no longer afford to maintain it.
How higher mortgage rates are creating further challenges for divorcing couples
Additionally, time is not on anyone’s side. There is now an increased urgency to sort out any issues as quickly as possible, before mortgages go up again, and existing offers are withdrawn.
One of my clients, whose fixed rate expires next April and cannot afford to switch to a standard variable rate, is running out of time to finalise the divorce and sell the family home. As her only option in the new market is shared ownership, her choices of property and locations have also dramatically narrowed.
With other clients, I’ve seen that the low-rate mortgage has turned into a major source of contention, as couples argue who should keep it – either on the present home or porting across to a new property.
Considering current rates are at around 6% for a five-year fixed deal, holding onto the lower rate, in some cases around 2%, will potentially save one spouse thousands of pounds.
Moving forward – can these problems be resolved?
Couples who are divorcing now face a new financial reality due to the ongoing uncertainty around interest rates and the property market, which makes it much more challenging for them to come to an agreement.
As a result, people will need to consider how they divide their money and mortgages in new and more creative ways to ensure they can move on with their lives in the best way possible.
Nicky Hunter is a partner at Stowe Family Law
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