Divorce: The long and winding road
Divorce is rarely a simple negotiation. Just look at the McCartneys, says Stephen Pritchard
Wednesday 23 August 2006
Sir Paul McCartney and Heather Mills are just the latest high-profile couple heading for the divorce courts. And they are far from alone. This year, there will be some 167,000 divorces here, and the figure is expected to go on rising.
The emotional upheaval is only part of the picture: divorce also wreaks havoc with the finances of both parties. Unravelling joint finances takes time, and when it comes to the home, relying on a single salary might well mean a struggle to climb back on to the property ladder.
Couples who live together, who own property jointly but aren't married, can find themselves in an even worse position. Without recourse to the courts, reaching a fair settlement can be tough.
With divorce, the people who are worst hit are often those who have been together for some time. If one partner, usually the wife, has had a career break to bring up children, or given up work altogether, he or she might have taken a back seat in financial planning. "Often, one partner is more responsible for managing the finances, especially the main breadwinner," says Brian Murphy, lending manager at the Mortgage Advice Bureau. "It comes as a shock when they realise mortgage costs and the impact of changes in rates."
How does divorce affect your home?
For many divorcing couples, this is a real problem. Rising house prices mean that it can be hard to buy even two modest properties from the proceeds of selling the family home. The cost of transactions, especially higher stamp duty, also eat into the budget.
"People who are coming out of a relationship, especially those who have had a career break, may have lost touch with what it costs to service an average mortgage - now around £120,000 - says Murphy. A 25-year mortgage for that amount would cost round £550 a month, depending on the deal. And if one partner plans to stay in the family home, they will need to be able to cover the whole mortgage after the split.
Another problem is the time it takes to reach a divorce settlement. "If you have to wait for the divorce to finalise before moving on, that can take years," says Anna Bowes at the financial advisers AWD Chase de Vere. Couples who are splitting should talk about what to do with the property at an early stage, as this will make it easier to plan ahead.
What about the mortgage?
If one partner is staying in the family home, they have two options: to take over the existing mortgage, or arrange a new loan. If their income is sufficient to cover the mortgage and there is no need to raise new funds - for example, to give the partner who is leaving a share of the equity - then there will be few problems.
But for most couples, it's not that simple. If the partner staying in the property needs to remortgage, they will have to prove that their earnings are enough to support the new loan. This can be a struggle, especially if they are relying on maintenance payments to cover the costs. Many lenders only take 50 per cent of maintenance payments into account when assessing a mortgage. So, even if their ex pays the full cost of the loan, they could still be turned down by a lender.
A few lenders recognise that this is unfair. Yorkshire Building Society, for example, has a Fresh Start mortgage that takes 100 per cent of maintenance payments into account. It also offers an interest-only mortgage for the first six months.
When it comes to buying a new property, the newly single person is effectively starting from scratch on the property ladder. It is a good idea to check your credit record and speak to an independent financial adviser or mortgage broker about the options. In the short term, it may be simpler and cheaper to rent.
What if I am struggling financially?
It is critical to act quickly to stop debt mounting up. Approach your lender as soon as possible to see if they can arrange lower monthly payments, or a payment holiday. "The lender is bound to be sympathetic if they are kept informed of your situation," says Murphy. "They can switch you from an interest-only to a repayment mortgage, or arrange a payment break until you are back on your feet."
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