I have seen an increasing number of enquiries for Mortgage Capacity Assessments from clients going through Divorce who are aged 60 and over in recent months. Whilst Divorce at any time in life is difficult it presents a number of additional and unique challenges for those approaching, or already in retirement.
Traditional Mortgage Lending Is Not Always the Answer
Traditional mortgage lending can be very restrictive for those aged 60 or over. Especially those who are still working but within 5-10 years of retirement because many lenders will calculate borrowing based on retirement income, completely disregarding current earned income. Whilst some lucky individual’s may be in a position to enjoy a retirement with income equal to that of their previous working salary, most of us will see a drop, often substantial, in our income once we retire. This leaves less money available for mortgage lending.
Problems associated with calculating mortgage lending based on estimated retirement income may be further compounded by any pension share which may be under negotiation between divorcees. Any share of pension funds could deplete an individual’s eventual pension income reducing the amount which they are able to borrow further. Although a pension may have been able to support one household comfortably, when split and stretched across two households divorcees may well find themselves in need for more income at a time when it is very difficult to obtain it.
Furthermore, although some lenders may consider providing an individual with a mortgage up to their 80th Birthday many will only offer lending up to the applicants 70th or 75th Birthday. With such a short mortgage term there is very little time to repay a mortgage which may further reduce the amount available to borrow.
In many cases traditional mortgage lending is not the answer to their needs.
Lifetime Mortgages Could Help……
Upon divorce it is often a desire for one of the divorcees to stay in the family home. The emotional upheaval of a divorce is often too much to bare without the additional strain of moving home, not to mention added costs involved in moving such as stamp duty, estate agent fees and legal costs. However, as discussed above, the divorcee wishing to remain in the family home may not have the capabilities to secure lending in order to ‘buy out’ their ex-spouse. Without this it is highly likely that the family home will need to be sold.
Equity Release could provide a way for divorcees to separate whilst easing the financial burden it causes. The divorcee granted to remain at the family home could take out a lifetime mortgage in order to release equity, which in turn could be used by their ex-spouse to fund or part fund the purchase of a new home. Unlike a regular mortgage many lifetime mortgages do not require the borrower to make any repayments, instead the interest is ‘rolled up’ and becomes payable only when the property is sold, reducing month to month expenditure.
It is important to remember, however, that a lifetime mortgage will reduce the value of the estate, therefore, reducing the level of inheritance, and it could affect the tax they pay and any welfare benefits received therefore financial advice should be sought.
Although the amount that could be available to borrow depends on the age of the divorcee and the value of their property, for those at retirement age and going through a Divorce lifetime mortgages could be a feasible, cost effective option.