Equity Release & Divorce in Later Life

Divorce in later life

It seems as though the number of people deciding to divorce after they have is increasing. We tend to live longer than our parents and grandparents, and consequently have greater expectations about how we will spend retirement.

Perhaps being thrown together with more leisure time exposes problems that have always been there, or maybe the excuse of providing a stable home for the family has expired. It is also more manageable from a financial point of view. Wealth built up in the family home can be shared to provide support for both partners. Equity release in the form of Lifetime Mortgages is a flexible way to access that wealth.

How can a Lifetime Mortgage be used in divorce?

Many people will be familiar with the idea of Equity Release. It is a way of turning some of the wealth tied up in your home into spendable cash. This is often used to settle outstanding debts at retirement, maybe a traditional mortgage that has not yet been redeemed, or to provide money for extra luxuries.

There are two ways that this might help people at the time of a divorce.

The first is where one party in a divorce would like to retain the family home. At the point where the house is transferred to a single name, that person can raise a lump sum using a Lifetime Mortgage and use the funds as part of the divorce settlement.

Does divorce need to be finalised before you can use a lifetime mortgage? Actually no, people who have formally separated can apply for a lifetime mortgage to release equity Lenders have to be confident that the other party has no further claim over the house. Usually, this means that you have a Deed of Separation which has been executed through the court. This will include a legally binding financial agreement.

The second and perhaps less well-known option is that a Lifetime Mortgage can be used to provide funds for the purchase of a new home. Both parties can top up their purchasing power to buy a more comfortable home than they could afford otherwise. For example, if you have £200,000 from the sale of the family home, you could borrow, perhaps, £150,000 which would allow you to buy a new home worth £350,000. The actual amount of the Lifetime Mortgage will depend on your age and the maximum rate of interest you are prepared to accept.

How much can I borrow using a Lifetime Mortgage?

The amount you can borrow will depend on your age and the value of the property your mortgage will be secured against. The minimum age for borrowing is 55 although the amount available is relatively low and interest rates are very high. At that age, you might prefer a conventional mortgage and keep the lifetime mortgage in your pocket in case you need it after a few years.

The maximum borrowing is around 55% of the property value and this is available to people applying later in life. For example, a property worth £300,000 could support a mortgage of just over £160,000. The exact amount, and the interest rate, will depend on your circumstances at the time you need to apply. Ask an adviser if they can help – at least you will understand what is possible.

Use our equity release calculator to get a general idea of what might be available to you.

How does a Lifetime Mortgage Work?

A lifetime mortgage is very similar to the ordinary mortgages that you may have had in the past. The amount you borrow is secured against your home. Unfortunately, for standard mortgages, this means that if you do not make the payments as they fall due, or if you are unable to pay off the outstanding amount on the due date, the lender may take legal action to take possession of your home. This is not a risk you face with a lifetime mortgage.

The first major difference is that a lifetime mortgage does not have a fixed end date and does not have to be repaid at a specific time. It can remain in place until the mortgage holder, or second mortgage holder in joint cases, either dies or is forced to go into full-time care. At this point, your family or your estate have a year to sell the property and clear the amount outstanding. The lender would only consider taking possession if, at the end of that year, there appears to be no completion date for the sale.

The second difference is that you have a choice whether to pay some or all of the interest as it falls due. If you pay the interest, the amount owed back to the lender does not increase. If you are unwilling or unable to pay all or part of the interest, it will be added to the amount you owe. This does have the effect of compounding the interest that rolls up.

The impact on your estate will depend on whether house prices continue to rise as they have in the past. It is possible that even if you allow all of the interest to roll up, the increase in the market value of your home will completely offset the increase in the mortgage.

What are the risks of a Lifetime Mortgage?

The first thing you need to consider is that the estate that you leave to your beneficiaries is going to be affected by divorce and that a lifetime mortgage may reduce the value further. This is particularly true if you allow the interest to roll up. Although we can predict the interest which is at a fixed rate for the duration of the mortgage, we don’t know how long it will run or what will happen to property values in that time.

You will receive an illustration, however, which will show you how the amount you owe will change, and how much your home will be worth in certain circumstances.

Some people worry that Equity Release means that your house is at risk. As we pointed out earlier, you always remain the owner of your house. The amount you owe might vary depending on whether interest is paid or not, but it remains your house for as long as you are able to live in it.

When the mortgage has to be repaid, your beneficiaries have a year to sell and raise the money to repay lenders. This means that the house can stay in the family if your beneficiaries are willing and able to raise a new mortgage to settle the outstanding amount.

What if you want to have a new partner move in with you? This is important because, if they survive you, the house may have to be sold and this would leave them without a home. Depending on the relative age of the new occupant, you could approach lenders and ask them to vary the mortgage which might include a change to the interest rate.

Alternatively, you could remortgage to another Lifetime Mortgage lender although there may be costs involved in paying off a mortgage early.

When should I approach an adviser?

Lifetime mortgages related to divorce and separation, or used for the purchase of a home, are more complex than the standard application. Even if the potential need to borrow is still on the far horizon, it is worth contacting an adviser early. It will allow you to find somebody you are happy to deal with. If it’s us, we’d be delighted to guide you through the process.