Equity Release and Divorce

Podcast approved by The Openwork Partnership on [xx/xx/xxxx].

What happens to your home during a divorce? Can I use equity release for a divorce settlement?

What happens to a home during a divorce really varies from case to case. It depends on the finances of the parties involved and whether one person can afford to take the home on themselves, or if they will be forced to sell.

There are a lot of implications there – who wants the house? Who doesn’t? Does one partner want the other to have it? It can be bought by either party, if the other is okay with that.

In terms of using equity release for a divorce settlement, you can use it for anything, really, other than business purposes. You could use equity release to buy the house in full. Let’s say the house is worth £400,000 and one party wants £200,000. The remaining party can use equity release, if they qualify, to get that £200,000 and pay off the other’s share.

When might equity release be an option for divorcing couples? How can equity release help with the divorce settlement?

Firstly, you’ve got to be eligible for equity release. As we’ve covered off many times in the past, you’ve got to be at least 55 and the property would have to be your main residence.

You could take equity release to pay off your ex-partner. The main issue is going to be how much you can borrow and your age. The older you are, the more you’re able to borrow with equity release.

If you’re only just over 55, it might be difficult, depending on the settlement and what’s required. You’re only going to be able to borrow perhaps 25% or 30% of the value of the home.

There are lots of options to consider. The first thing if you want to buy the home is to see if you can get an ordinary mortgage. If not, you might look at equity release as an alternative. If that doesn’t work for you, you may be faced with selling the home – it’s sad, but if neither of you can afford to keep it, that’s often the best solution. That could be the same whether you’re 30 or 60 – it’s no different in that sense.

Can you do equity release if you are under 55? Do both partners have to be over 55 for equity release?

There’s no option to do it under that age. You’ve got to be at least 55. If it’s a divorce or a separation then only the partner that’s remaining in their home has to be over 55.

You can only do equity release on your main residence. You have to be living in it as your main home.

What happens if a couple with a joint mortgage split up?

If there’s a joint mortgage, that has to be paid off. That’s always the case. Usually a mortgage is a couple’s biggest financial debt.

You could have two scenarios. Perhaps a 60 year old couple are splitting up and they’ve got a mortgage. They’d have to pay that mortgage off. Using equity release, the partner remaining in the house would pay off that mortgage with the equity release and provide their partner with enough equity to walk away.

If there’s no mortgage, one party could use equity release to pay the other one off so they can buy something else.

Interestingly, divorce in the over 55s is going up – whereas divorce generally has gone down.
A few weeks ago I had two conversations within half an hour, and in both cases the clients were men whose wives had decided to leave the home and split up.

It was out of the blue for both of them. They wanted to stay in the home but needed to understand how to pay their wives off. That’s the issue. The wife doesn’t just want the mortgage paying off – she wants to be released from the mortgage and get her half of the equity. That can be financially difficult.

An important thing that I explained to these gentlemen is that if they were all over 55, their wives could also use equity release on a purchase as well.

What are the mortgage challenges in a divorce?

Divorce can be very financially challenging. Let’s say your house is worth £300,000. You divorce and walk away with £150,000. All of a sudden your standard of living has dropped dramatically.

You’ve decided to leave the matrimonial home, but now you’ve only got £150,000 to spend on a property. But if you’re over 55 – and you can’t borrow money on a standard mortgage or loan – you could actually use equity release to buy a home.

So, the person staying in the home could use equity release to pay their ex, and the one who has left can use equity release to buy a more suitable property.

When somebody walks out of a relationship and wants half of the property value, it’s very complicated if they disagree on what it’s worth. They have to get surveys and valuations as the basis of discussion – it can even end up in the courts, costing lots of money.

Someone leaving the family home is likely to want to get as much as they can to go and buy a house. If equity release is available to them, it could ease that pressure and lead to a more amicable split.

So there could actually be a benefit to those gentlemen I mentioned if I then talk to their wives about equity release. They could buy something more suitable for them.

Is there a better alternative to equity release during a divorce?

As with all equity release, we always look at whether there are better alternatives. Even if a client comes to me asking for equity release for any reason we explore their alternatives to see if there’s a more cost-effective option.

It might well be that a standard mortgage is the better way of doing it. I’ve also seen people getting a loan from family instead. A retirement interest only mortgage might also work. It all depends on affordability.

The main reason that equity release rears its head is that later on in life, people haven’t got access to the mortgages they could take out when they were younger.Where’s a 70 year old man going to get a mortgage from, if it relies on his income?

Another alternative of course is to sell the house. But if you’re used to living in a £300,000 house and you’re going to split it down the middle, are you going to want to live in a £140,000 flat?

Life’s tough enough for someone who is splitting up with their long term partner. Perhaps it will get even tougher if they have to go and live in an area they don’t really want to live in. It’s a huge change. It’s a serious position to be in – and equity release may be a real saviour. With many people it comes to the rescue and helps them get started.

Do I need a solicitor to buy out my partner?

Yes, you still need legal support to do what’s called a transfer of equity. You’re transferring the equity from two people to just one.

If the main mortgage has been paid off and you’re transferring it into the remaining partner’s name to stay in the property using equity release, you need face-to-face advice. That’s always standard with equity release for any reason.

What are the benefits and risks of using equity release during a divorce?

We’ve probably covered off the benefits already. One point to make, and this is not just about divorce, is that people don’t know what their options are. This frustrates me – there are so many people making decisions about a life changing problem or situation without the full facts in front of them.

So it’s good we’re trying to get out there with this information. It gives people the opportunity to understand that there are solutions out there.

The key benefits are potentially to get a nicer house in a nicer area, or stay in the house and afford to pay your ex off without having to pay the mortgage back.

There’s no specific risk when you’re using equity release for divorce per se. It’s the usual risks associated with equity release. The key thing is that it’s a lifetime mortgage. It’s fixed for life. You don’t have to make payments, but if you don’t, the interest compounds and could erode the equity in your property.

The house is still yours. The mortgage is repaid when you die or go into long term care. Whatever money is left after payment of the loan and the interest would then become part of your estate.

If you’ve got children and want to leave some of the house to them, the risk is that the equity on that property is reduced. Having said that, if you have enough income you might choose to pay some or all of the interest, which means it doesn’t accrue. But in most cases, that’s not something people do.

You have shown how an equity release advisor can help here, have you got anything to add?

Not really, other than to recommend you speak to an advisor earlier rather than later. People do tend to leave things very late – so seek out advice, as it lets you consider all your options.

I’m always happy when people seek me out earlier rather than later. Of course we still help people that leave things to the last minute, but it’s not necessarily ideal for them.

This sounds a bit bizarre, but I have clients who are talking about splitting up and selling properties in a year’s time. Often with divorce, people are living together because they have to. They don’t really want to do that, but can’t afford to do anything else.

I can’t imagine what that scenario’s like. I had a woman here a few months ago who had been living with a partner, even though they split up two years earlier. So seek advice as soon as the problem raises its head – at least you can explore your options.

When you’ve got that knowledge and that understanding, you’re more in control. Ultimately that makes any process less stressful. It’s free advice – it’s not costing you any money, so let’s see what we can do to help you.

Equity Release & Lifetime Mortgages will reduce the value of your estate and can affect your eligibility for means tested benefits.

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