A consideration which frequently arises in financial cases – particularly arising out of a separation or divorce, is whether the parties involved have a “mortgage capacity”, and if so what it is. But why?
In divorce proceedings, the Courts (and therefore us as family law specialists) give consideration to a number of factors under Section 25 of the Matrimonial Causes Act 1973. One of those factors is “the financial resources of the parties”. This doesn’t just include the assets available to parties but also their ability to borrow money, particularly by way of a mortgage.
This will not be relevant in every case – but in the vast majority of cases it will be – and so it is really important that parties know where they stand and what their options are.
There is a lot more to mortgages than most people think and I was recently able to catch up with David Milbourn of Stringer Mann to discuss this interesting topic. The podcast is available to be listened to here but I will set out here the top 5 points for those facing separation and the related financial discussions.
- Despite what many think, if a mortgage is in joint names, then the parties are jointly and severally liable. That means that the mortgage company considers anybody named on the mortgage to be responsible for the whole thing. If the mortgage falls into arrears, both parties’ credit ratings will be adversely impacted (even if they are ‘made up’ later), and in the worst-case scenario, a property can end up being repossessed. This means that careful consideration has to be given to arrangements for payment of the mortgage following a separation and pending a final financial resolution. And, of course, any arrangements must be clearly agreed.
- Something which some parties consider is switching a mortgage to interest only terms, or taking a ‘mortgage holiday’, to relieve some of the financial pressure while an agreement is reached. However, it is important before making any decisions to take appropriate advice to understand the implications of this because it may place you in a precarious position or result in arrears on the mortgage. From the legal perspective, it is important that agreement is reached about any decisions which need to be made on a short-term basis because it may have implications in the wider context of the financial discussions and negotiations.
- When a lender looks at an application for a mortgage, it is not a simple case of multiplying a person’s salary. They will carry out a stringent assessment of both affordability and sustainability. Both affordability and sustainability may be variable depending upon what terms are agreed by way of a financial settlement. It is therefore important that as well as independent financial advice, parties to a separation also take legal advice from family solicitors so that the interplay between the two areas can be given due consideration. For example, a mortgage lender will look at income, but you need to understand what maintenance may be paid or received in order to understand your income position fully.
- When seeking a mortgage, a mortgage lender will look at maintenance which is received – whether spousal or child maintenance – but they will want to see either a reliable history of payments being made, or a Court Order, and to see how long it is due to be paid into the future as well. It is therefore important (and for so many other reasons) that a formal agreement is drawn up as a Consent Order and approved by the Court, as and when financial arrangements are agreed.
- There may be a significant disconnect between what a mortgage capacity report says a client can afford to pay each month, and what they themselves think they can afford given the standard of living which they have enjoyed in the past. This is another area where it is important to have both financial and legal advice because it is important for somebody to understand how their needs/monthly outgoings may be assessed by the Court as well as how that impacts upon their mortgage capacity.
There is much more to learn about mortgages and so please do listen to the Family Law Featuring: Mortgages podcast for further information about the above, foreign income, guarantors and much more.