How equity release can help with a divorce settlement

Sadly, divorce can happen at any age and although encouragingly divorce is on the decline for most, divorces among the over 60s has doubled since 1993 according to figures from the Office for National Statistics (ONS).

Clients that I speak to going through a divorce typically prefer a clean break and are considering their future living arrangements.

It is often the case that the marital home is by far the largest  asset in any divorce financial settlement. It could be that the couple will decide to sell the property and split the proceeds and purchase their own properties. More often than not however, I find that one party wishes to remain in the marital home if this is possible.  

Can I use equity release to buy out my partner?

Releasing some equity from the marital home through an equity release arrangement can enable one of the divorcing party to continue living in the marital home and become the sole owner of the property, providing funds for the other party to pay towards or purchase outright a property for them to live in.

The moving party could also take out an equity release arrangement if needed, to bridge any shortfall between the monies released to them from the marital home to pay towards their own property and the purchase price of their new home.  This enables both parties to maintain their status as homeowners following divorce. 

The most popular type of equity release arrangement is a Lifetime Mortgage.  

What is a Lifetime Mortgage?

A Lifetime Mortgage, as the name suggests, is a mortgage that is taken out over your lifetime. It does not need to be repaid to the lender until either the death of the homeowner or if the homeowner were to move permanently into care when the property would typically be sold.  

The youngest age a homeowner can take out a Lifetime Mortgage is aged 55.

Lifetime Mortgages have fixed interest rates, which are fixed for the home-owners lifetime from outset.

There is no requirement to service the interest and make any capital repayments of the Lifetime Mortgage during your lifetime, although homeowners can do so if they wish and if it is affordable. Therefore, taking out of a Lifetime Mortgage need not negatively impact your cash flow at all.

There are no affordability checks undertaken by the lender when taking out a Lifetime Mortgage.  But the taking out of a Lifetime Mortgage could impact means-tested benefits being received, so these do need to be taken into consideration.

A Lifetime Mortgage is portable so if the divorcing parties who take one out decide to move in the future, they can transfer the borrowings onto their new property, subject to the new property being of sufficient value to support the borrowings and it meets the lender’s lending criteria.

Lifetime Mortgages nowadays have a lot more flexible features than in years gone by, when equity release received a lot of bad press.  An additional attractive feature is the No Negative Equity Guarantee.   This guarantee means that homeowners or their estates will never owe the lender more than the property is worth when it is sold.  Typically, there will be equity remaining in the property as the homeowners will continue to own 100% of the property so will benefit from any increases in its value.

It should also be considered if the homeowners qualify for a more conventional residential mortgage if affordable.

How a Lifetime Mortgage works in practice

I think it is always good to reference an actual client situation where a Lifetime Mortgage was used to achieve a clean break in a divorce.  I was asked to consider the financial position of a very nice gentleman,  aged 74, whose  marriage had irretrievably broken down.  The main asset of his marriage was the property worth £800,000, which was unencumbered.

His main objectives consisted of the following:

• Needed to fund a lump sum of £375,000 to pay his soon-to-be ex-wife as part of a divorce settlement agreed at a fixed for life interest rate.
• Wanted to preserve as much of his liquid capital as possible, but for this to be balanced against the interest rates applicable for a Lifetime Mortgage, which are higher for higher amounts of equity released.
• No plans to move but may look to downsize in around 5+ years.
• Wanted to continue to own his property in full and benefit from any increases in the value of his property.
• Wanted to have the ability to transfer the borrowings under the Lifetime Mortgage to a new property, if and when he moves in the future, and repay any balance the lender requires at the time, without any early repayment charges being imposed.
• Wanted to have the ability to make repayments of up to 10% of the amount borrowed through a Lifetime Mortgage when affordable, which most lenders allow without any early repayment charges being imposed. 

We were able to meet all of the gentleman’s above objectives by taking out a suitable Lifetime Mortgage.  His soon-to-be ex-wife was herself able to use the lump sum received to pay towards a property for her to live in.

The gentleman was relieved to be able to continue living in the property he loved and have sufficient cash flow coming in to provide him with a comfortable lifestyle as there isn’t the requirement to service the interest or repay any capital for the Lifetime Mortgage over his lifetime.

He was a chap who told me he swims a mile regularly a few times a week.  He and I have that in common though not sure I will be able to do that at age 74!

Can we help you? 

If you need help in exploring if equity release can facilitate a divorce settlement, please do get in touch.  As independent financial advisers, we will consider your whole financial situation to ensure you get the right outcomes. Why not give us a call for a free initial discussion today and see how we can help you.

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Please note: This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.