As though divorcing couples didn’t have enough on their emotional plates, the Bank of England has given them yet another headache this month.
Added Complication
Interest rate hikes putting up mortgage repayments will inevitably mean an added complication for couples splitting their assets and add to the paperwork and negotiations for their lawyers.
Ben Glassman, financial planning partner and head of family & divorce at wealth management firm, Evelyn Partners, said that when couples divorce one spouse typically remains in the family home to minimise disruption especially for children and to avoid legal, mortgage and property transaction fees. When this happens they often buy the other spouse’s equity share in the property.
Glassman said: “But the spouse who stays will usually have to find the money to buy the other’s share of equity and, if they can’t draw on other assets to do so, the new interest rate environment could make it difficult for them to obtain the extra borrowing. The shared mortgage could be on a low-rate fixed deal with years to go, and the spouse who departs might feel aggrieved at having to borrow at sky-high rates to fund their new property.”
But where the divorcing couple have to sell their home, a weaker property market could see them having to accept a lower offer than expected and it could also entail paying an early repayment charge if the mortgage was fixed. Each spouse with their share of the equity, will have to secure a new mortgage at higher rates to buy their own property.
Glassman said: “With rates where they are, a single buyer might find they can afford less than they’d hoped, without moving to a cheaper area – and this will be especially the case for older borrowers who cannot keep costs down by extending the term beyond 25 – or even 20 – years.”
He added: “But the biggest legal bills occur when there is a dispute over the financial settlement, which is a separate matter to the divorce itself, and can often drag on much longer. An agreement over the splitting of assets that is arrived at amicably, and preferably at an early stage, is pretty much essential if both parties want to minimise stress and expense.
“For many couples to achieve this, advice from a financial planner with experience of divorce will be invaluable, particularly where pensions or other complex matrimonial assets are concerned.”
Costs of divorce versus financial advantages of staying married
The costs of divorce are higher than ever as the cost of living crisis bites and mortgage rates have spiralled, with the threat of a possible recession on the cards. By contrast couples stand to save money if they stay together by pooling their resources. There are also tax advantages for married couples.
According to Glassman, those moving to a newly single life can get a nasty financial shock, especially in regard to property, mortgage and rental costs.
But he warned against any temptation to ‘go DIY’ over a divorce process and especially the financial settlement.
“The biggest legal bills occur when there is a dispute over the financial settlement, which is a separate matter to the divorce itself, and can often drag on much longer, Glassman said, adding: “An agreement over the splitting of assets that is arrived at amicably, and preferably at an early stage, is pretty much essential if both parties want to minimise stress and expense.”
Adding extra fallout to divorces was surely not on the Bank of England’s mind when it put rates up but it could well be yet another unintended consequence of a painful policy.
