Mortgage implications of divorce

Much has been written about the new pension sharing remedy open to clients and their advisers since 1 December 2000.

However, writes Gareth Fatchett, the comments to date have obscured the equally important issue of meeting the future housing needs of both partiesThe breadth of ancillary relief proceedings gives rise to many new issues which lawyers now have to address.

The primary concern of the court is to ensure that the family is housed and the children are protected.

To achieve these primary objectives, the former couples assets have to be stretched further than they ever have been before.

Most properties are subject to a mortgage.

Consequently, with the mortgage lenders interest a factor in the decision, careful consideration has to be given to the approach and tactics to be adopted in the negotiations between the parties.Unsatisfactory choicesThe best family solicitors have already realised the importance of providing a complete service and of improving the resources and choices available to their clients.

They consider with their clients alternative means of financing their housing, options such as the encashment of insurance policies and other financial products which may be appropriate to their clients.

However, all too many clients and their solicitors simply undertake a fact-finding mission.

They have the property valued and the outstanding mortgage liability calculated.

From this it becomes clear that many solicitors and their clients will be left with the unsatisfactory choice of having to approach the lender to see whether it will permit the mortgage to be transferred to a sole name.

In many cases this is something the lender will be reluctant to do, leaving the client seeking guarantees of future mortgage payments from their ex-spouse.

The housing needs of those spouses who now find themselves with no home and a guarantee to pay the mortgage of the property now occupied by their former spouse will still have to be addressed.

The mortgage market as a whole is not that sympathetic to applicants in a divorce.

Ironically, a single missed mortgage payment not an uncommon occurrence in the turmoil of a separation can tarnish applicants with a spotless credit history.There is little point in offering warm words of comfort to clients.

Solicitors need to address the issue of housing early in the divorce process.

In that way they can see a clear path to bringing other assets into the equation as a negotiating tool.Client liabilitiesSolicitors need to establish the loans and liabilities of each of the parties and the details of their financial commitments.

In many cases couples have certain agreements in one spouses name and others in the other spouses name.

With one spouse owing credit on the carpets and the other owing on the curtains, common-sense approaches must be found.

At all times, solicitors must see whether it is possible to reduce expensive short-term credit commitments.

This will then free income for use in mortgage calculations.

For clients older than 50 there is the possibility of realising pensions by releasing a lump sum.

Circumstances vary greatly, but one thing is certain, lenders even though they provide credit do not like customers owing monies to them.EquityThe equity in a property does provide a margin for leeway.

Lenders do not like properties with more than 75% loan to value.

Many charge mortgage protection premiums.

Although there has been a trend away from insisting on these policies, solicitors will seldom find a lender willing to offer its no-mortgage-income-guarantee deal to divorcing couples.Life assuranceIf the property is financed by a mortgage, which is interest only and is supported by an endowment, an ISA or a pension, then additional consideration needs to be given to the best approach to adopt to secure continued contributions to the underlying investments.

The need for life assurance and an ability to repay the mortgage in the event of death or critical illness is a key concern for lenders.

Many lenders are not the slightest bit interested in the circumstances, however difficult.

Their primary concern is to ensure repayment.Client agesOlder clients need to be aware that lenders do not like extending the terms of a mortgage beyond the 70th birthday of the borrower.

Solicitors need to be able to counsel clients so that, when they look at how best to fund their future housing needs, they are aware of these lender imposed limitations.Advising clientsMortgage brokerage is regulated by the Mortgage Code Compliance Board.

The board requires registration and proof of adequate professional indemnity insurance.

The Law Societys group consumer credit licence will cover this work but firms will need to quote the number which is G900001.

Principle 25.09, note 10 in the Guide to the Professional Conduct of Solicitors, 1999, eighth edition, gives additional guidance.

When dealing with a clients life assurance and investment products, investment business issues may arise.

Unless a solicitor is authorised to conduct discrete investment business, he will need to help clients to obtain independent financial advice from an alternative source.Principle 25.09 reminds solicitors that their duty to give independent advice is not normally discharged by referring a client to a lender who is an appointed representative of a life assurance company.Mortgage brokerageMany firms deal in the cleaner first time buyer or mover mortgages.

A divorcing couples affairs will be more complicated and will require a great deal of preparation before submission of a mortgage application.

A dedicated broker will have contacts with managers who have a mandate.

Without these entry points, clients can get lost in a maze of national call centres.Pension sharing on divorce has made the housing need issue much more relevant.

The pension credit is a bargaining tool which can be used to assist in meeting the new family housing needs.

Be aware of the issues, be prepared to refer the work to an independent financial adviser and most of all prepare clients for what may be a difficult process.Gareth Fatchett is principal of ProACT Legal and a member of the Law Societys financial and investment business working party