Divorce – How good are lenders at helping people through a divorce in terms of products? What can they do in terms of refinancing, payment holidays etc..?
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Latest figures from the Office of National Statistics surprisingly show a decline in the number of divorces issued in the UK between 2004 and 2005 – figures for 2006 are not yet available. In 2004, 167,138 decree absolutes were issued, while in 2005 this figure dropped by 7 per cent to 155,052. This is the lowest number of divorces since 2000, and the first annual decrease since 1999-2000. The highest number of divorces was recorded in 1993, which totalled 180,018. 2005’s figure is 14 per cent lower than levels in 1993 and yet the mortgage market is awash with concerns over affordability and credit problems, which are seen as being a consequence of the reported increase in the number of divorcees.
Alliance & Leicester (A&L) in particular, has undertaken a number of studies into trends and issues which have an effect on the mortgage market and conclude that they are largely due to the increasing levels of divorce.
One such study looked at the contrast in financial circumstances of divorcees to married couples. Part of the research illustrated that just 61 per cent of divorcees owned their own home, compared to 82 per cent of married couples.
Additional research revealed that nearly a quarter of parents in the UK have to rely on renting or living with their grandparents, as they are unable to afford their own property. Despite the recent reduction, divorce rates are expected to double by 2021, thus increasing the number of single-parent families who will find it harder to buy their own property.
Furthermore, with higher divorce rates and people staying single for longer before going onto have children and marry later on in life, A&L predicts that by 2026, 9.9 million one-person households will exist, an increase of 53 per cent which equates to 75 per cent of the total annual household growth over the next two decades. Its predictions also include a reduction in the number of Mr and Mrs households with 2.4 children. Property developers are now adapting to these changes to the household structure, moving from four-bedroom detached houses, to smaller, more densely populated two-bedroom properties. This will result in some progress in meeting the 200,000 extra new properties a year that will be required until 2026 to satisfy the levels of individuals living on their own.
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Singletons
Research by mform.co.uk has backed up A&L’s predictions regarding single living, as they have recently reported that over the past three years, 26.2 per cent of purchases were for single people. However, that figure is set to rise, with 39.8 per cent of people hoping to buy a home in the next three months planning to live alone. Furthermore 10 per cent of 25-44 year-olds live alone, compared to 2 per cent in 1973. Research indicates 35 per cent of all households in the UK are expected to be in sole occupancy by 2021.
Francis Ghiloni, marketing and business development director at mform.co.uk, said: “If more of us decide to live alone, that means more demand for property, which will place greater pressure on prices making it more expensive to own a home. This will be made all the worse by the fact that there is a growing shortage of homes in the UK. The falling number of marriages is having an effect on the rising number of people buying homes on their own. Similarly divorce – which runs at around 150,000 a year – is also contributing”.
A&L’s director of mortgages, Stephen Leonard, recently commented, that ‘mortgage lenders need to recognise that future generations of homebuyers’ will have differing needs and financial circumstances and will need to consider this when designing mortgage products’.
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He also pointed out that ‘the decrease in the number of nuclear families as a result of divorce could mean an increase in the number of rented households with children. Although parental renters may be put off looking into buying a home because of the expense they shouldn’t think that it is always out of their reach. More lenders are using affordability based lending based on their personal circumstances, which is a more realistic and accurate way to calculate what they can borrow”.
Specialist mortgages
Given all of these issues, what is currently being done by lenders to assist divorcees to remain on, or get on the property ladder in terms of mortgage products? Well, the majority of the lender community do not have a specific divorcee product range available, that is, apart from Yorkshire and Saffron Walden Building Societies
The Yorkshire was seen as an ‘innovator’ in this specialist market when it launched its ‘Fresh Start’ range in July 2005. It was launched after the lender realised that many of the people who purchase a property after a divorce are like first-time buyers. They may have left a partner and children in their family home, and are unable to borrow the full purchase price of their property. Yorkshire allows maintenance payments and working families’ tax credit to be taken into account as income and offers 100 per cent loan-to-value (LTV) and six months’ interest free credit.
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More recently, Saffron has launched a six month’s interest free product with a discount off the standard variable rate over the next 30 months, which is available up to 85 per cent LTV between £50,000 and £500,000. Effectively the borrower has a payment holiday to pay off debts, get comfortable with their new financial commitments or renovate the property straight away.
As to how far the rest of the lender community have gone to help a divorcee to remain in their marital home, or purchase a new property is not that obvious to a potential borrower on the face of it. But this is where brokers can come into their own to help to investigate the various options available to their clients.
As Leonard points out, affordability based lenders could offer more flexibility to the borrower, than those that use the more traditional method of applying income multiples to calculate how much an applicant is able to borrow. This may even give the divorcee the option of staying in the marital home. Lenders who adopt this approach include, Royal Bank of Scotland, Halifax, Nationwide and Cheltenham & Gloucester.
Offset mortgages could be another option to this type of client, however it has to be said that this type of mortgage, to make it appropriate, would require a substantial amount of equity which may not be available in all circumstances.
Another option for those who do not have the equity for a deposit, could be 100 per cent mortgages, however, the pay rates may not be as favourable as other prime market rates.
Flexible benefits
For divorcees fortunate enough to have opted for a lifestyle or flexible mortgage when they bought their marital home, they may have the option of making use of some of the benefits available from this type of mortgage. The option to take a payment holiday may be the saving grace for a couple separating and choosing to divorce, allowing them to take time out from paying the mortgage until their financial circumstances are resolved, for example as part of the separation agreement.
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Nationwide’s flexible options allow the borrower to overpay by £500 a month and take up to two payment holidays a year, without incurring any penalties. I know a lot of you will be thinking that hindsight is a great thing and that if they knew a client was going to get divorced then they may have suggested that a client opt for a mortgage with flexible options. The point that I am trying to make is that by offering the choice of a lifestyle mortgage as part of the recommendation, then they are getting the client to buy into a mortgage for life that can take them through the good times and the bad. Not only will they benefit if the worst happens and they separate, but also if they decide to start a family and they are reduced to having only one salary coming in. Too many borrowers choose a mortgage for the here and now, not for the future.
And finally a word of advice to brokers with clients in these circumstances, firstly, the majority of borrowers may not be aware that some solicitors have an issue with dealing with both the transfer of equity and the remortgage, so ensure that this is fully understood upfront. Secondly, things may not always run as smoothly as you would like in a relationship breakdown case. To ensure that your own back is covered at a time when things can get difficult, keep your records up-to-date and ensure that letters from you, your clients and their solicitors are kept on file, just in case you are called upon to justify your recommendations as part of the legal separation. Often divorce comes some time after the separation and you need to make sure you as a broker have adhered to the ‘Treating Customers Fairly’ principles during this difficult time.
