With almost half of all marriages ending in divorce, we speak with many people looking to use equity release before, during or after a divorce. But how does divorce affect an equity release application?
You can use equity release to pay for a divorce settlement. By releasing a lump sum of tax-free cash and giving an agreed amount to your ex-spouse, you can stay in your home or help purchase a new home. The amount paid to your ex-spouse often needs to be detailed in a separation agreement or consent order.
Let's look at how equity release could help through your divorce.
In this guide, you will learn:
Equity release can be a great solution when you want to continue living in your home but need funds to pay your ex-partner to remove their ownership from the property.
Equity release can provide a lump sum of tax-free cash at a fixed-for-life interest rate. You don't need to make any monthly payments towards the plan - unless you want to.
The amount released can be paid to your ex-partner as part of a financial settlement. Their ownership of the property will be removed, and you can continue to live there for as long as you wish.
The plan typically ends when you pass away or move into long-term care. At which point you will repay the initial amount you released, plus any interest charges.
Most plans are repaid from the sale proceeds of your property.
However, don't discount equity release if you do not plan to remain in your home for the rest of your life. Equity release can be more cost-effective than short-term finance options like bridging loans, and there are no affordability assessments to meet as there are with residential mortgages.
If you are married
Depending on the stage that you are at with your divorce/separation, you will need to provide documents including:
- Separation Agreement
- Consent Order
- Decree Absolute.
We will look at all of these in greater detail later in this guide.
If you are not married
For jointly owned properties where you are not married you will not usually have to provide any formal separation documents.
However, if you have co-owned the property for a long time (decades), you may need to provide a formal separation agreement.
When calculating the amount of equity that needs to be paid as part of a divorce, you must also consider any mortgages secured against your home, as they will need to be cleared as part of releasing equity.
Firstly, knowing the two types of property ownership for joint owners is essential.
The first is Joint Tenancy, which is the most common. You and your partner own the property 100% each, as equals. Therefore, the amount paid to your ex-partner for the divorce settlement will depend on your joint assets and what can be agreed upon - whether that is amicably or in court.
The second is Tenants in Common (TIC). When you purchased the property, you would have designated a specific split of the property's ownership to each of you. This is often 50/50, but it could be anywhere from 1% to 99% ownership.
A solicitor creates a deed of trust when you own a property as TIC; typically, the amount paid in a divorce will be the share of the property the other person owns.
Let's take a look at an example.
Mr and Mrs Smith jointly own a property as tenants in common worth £300,000.
As set out in the trust deed created for the tenants in common ownership, Mr Smith owns 25% of the property, and Mrs Smith owns 75%.
There is also a mortgage of £50,000 outstanding which also needs to be repaid.
Mrs Smith is going to be staying in the property after the divorce.
Therefore, she will need to repay the mortgage PLUS pay Mr Smith his 25% share of the equity in the home (equity = property value - mortgage).
In total, Mrs Smith will need an equity release of £112,500.
£50,000 to repay their joint mortgage, and £62,500 to pay Mr Smith his share of the equity (£300,000 property value - £50,000 mortgage = £250,000 equity. 25% of the equity = £62,500).
When you cannot release enough equity to buy out your partner, we refer to the extra amount needed as a shortfall.
Shortfalls can be covered by alternative means and may also be covered by other assets you are dividing.
Your equity release advisor will consider all other assets to determine whether you can cover this shortfall. Perhaps you have savings or an investment fund that you could use.
In rare circumstances, an unsecured loan could cover the gap if the shortfall was small and you could manage the monthly payments.
It would help if you also discussed with your family lawyer how to structure the division of assets to minimise any shortfall on your matrimonial home, should you wish to take full ownership.
Lastly, if it comes to it, you might have to sell your home.
Both you and your ex-partner can take the monies that you have agreed to each purchase another home.
But what if you do not have enough money to buy a new home after a divorce/separation?
You can use equity release to help you purchase a new home.
The cash you are left with after your separation can be used as your deposit to purchase a new property, and an equity release can help you top up your purchase price.
Say, for example, you are left with £150,000 after a relationship breakdown, but you need £200,000 to purchase a new home.
You could use the £150,000 from the settlement and a £50,000 equity release to purchase a property for £200,000.
This would happen simultaneously, with the equity release being paid through solicitors on the same day you complete your property purchase.
For a complete guide on using equity release to purchase property, click here.
You will need solicitors to provide you with equity release legal advice; however, you are not required to have a divorce lawyer.
Depending on the chosen equity release lender, they may also require the party being bought out to seek independent legal advice. This is to ensure the "deal" is fai, and neither party significantly loses out or benefits.
Therefore, it is good practice to use a family lawyer to handle the division of assets, even if not required.
It is typically easier to get equity release after the divorce is complete than during divorce proceedings.
Almost all lenders will require the "decree absolute", which is created when the divorce completes.
Sometimes, they will also require you to provide a copy of a consent order.
A consent order is a separate financial agreement when you get a divorce. The consent order deals with the monies and assets, whereas the divorce solely deals with the dissolution of marriage.
This document will also stop any ex-spouse from attempting to claim on the property or other assets included within it in the future. Most solicitors will strongly recommend that you have this in place if you do not yet.
Paying for household costs and daily living after a divorce using equity release
After a divorce, household income almost always drops, and you may find it difficult to make monthly payments for bills and daily living.
A type of equity release lifetime mortgage called a drawdown plan allows you to take some monies now and keep some for later.
You are only charged interest on the initial amount you release, and any funds kept for the future will be placed in a reserve facility. You are not charged interest on the amount held within reserve until you withdraw it.
Typically, you can withdraw from it in minimum amounts of £2,000 each time, but some allow for as little as £500.
This can be a great solution to help with day-to-day life after a divorce or separation.
For a complete guide on how drawdown plans work, click here.
Tip: If you are the only person living in a property over 18, you can claim single-person council tax. Visit https://www.gov.uk/apply-for-council-tax-discount to apply.
Divorce doesn't happen immediately, and perhaps you both choose never to be officially divorced. But how does this affect equity release?
You can get an equity release if you have separated but are not divorced. Almost all lenders will require a separation agreement to be created with assistance from a solicitor. The separation agreement will detail how the jointly owned assets will be divided among each party and stop any future claims on the property.
A separation agreement must be legally binding, which is why the lenders usually request for a solicitor to be involved in creating one.
A simple piece of paper with some signatures will not suffice - which we have seen in the past.
Lenders want as much security as possible to receive their money back in the future. Importantly, as the separation agreement is legally binding, your ex-partner cannot come back at a later date to make a claim against the property, saying, "I should have been paid more".
Creating a separation agreement may involve two solicitors—one to act for one party and the other to act for the other. Typically, the advice cannot be given to both parties by the same solicitor or firm. This ensures there is no bias toward one individual.
Several scenarios could unfold if you already have equity release and get divorced.
You are married, jointly own the property, and one of you remains at the property.
If you jointly own the property, your equity release will be in joint names too. You must notify the lender for a review when someone permanently vacates the property, or a divorce completes. They will assess whether the person remaining at the property can continue to have the equity released solely in their name.
The total property ownership would need to be transferred into the name of the person continuing to live at the property with an equity release plan. As we have looked at, this may involve paying your ex-partner a sum for their share of property ownership.
If you require a further advance from the lender to do this, the application would solely be in your name, not joint.
However, the lender could request that the monies be paid back. This is because someone permanently leaving the property can trigger the plan's end.
You could incur an Early Repayment Charge in this case. It will depend on the outcome of the lender's review.
You are married but solely own the property
Currently, two equity release lenders allow you to be married but take equity release in a sole name.
If you get divorced, and the other person not party to the equity release leaves the property, you need to notify the lender, but they will not conduct a review.
Instead, there will be no impact on your equity release, as it is in your sole name, and you fully own the property.
You are married and jointly own the property, but both vacate after a divorce
As with the other two scenarios, you need to notify the lender.
However, you will need to repay the equity release as you are selling the property.
Again, this could incur early repayment charges depending on your plan.
If one of you would like to take the plan with you to a new property, known as porting, you will need to ask for the lender's permission.
You should seek additional equity release advice if you already have an equity release plan and are separating or going through a divorce.
If you have further questions, why not speak with one of our qualified advisors?
Call us on 0207 158 0881 or use our online form to book your FREE consultation.
While a qualified equity release advisor has written this guide, it is not intended to be used as financial nor legal advice and should not be relied upon.
To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.
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