Going through a divorce is never easy, and if you share a home together, untangling your finances and deciding who – if anyone – should remain in the marital home can be difficult.
For some divorcees and separating couples over 55, equity release is considered a reasonable compromise, as it enables both parties to access some of the equity tied up in the value of the property to fund their future living arrangements.
Here, we look at how equity release works and some of the pros and cons of considering it if you’re going through a divorce.
What is equity release?
Equity release is a type of financial product typically only available to those aged 55 and over. It’s basically a way of accessing some of the value of your home while being able to continue living in it.
The most popular type of equity release plan is a lifetime mortgage, where you take out a loan secured against your home but do not make monthly repayments. You can take the money as a lump sum or as a regular income for a set period of time. Then, at the end of the term, which is usually either when you die or move into long-term care, the loan and the interest owed on it is repaid by selling the property.
The other main type of equity release is a home reversion scheme, which is similar but has different eligibility criteria. With this type of scheme, you sell some or all of your house upfront, and continue to live there rent-free until you die or move into care.
The main downside to be aware of when it comes to equity release is the impact of compound interest. Since you’re not paying off either the loan or the interest on the loan, the amount owed accumulates at a greater rate each year than it would if you were making repayments. However, equity release providers now allow you to make partial loan repayments during the term to reduce the amount owed.
You should also be aware that releasing equity from your home reduces the value of your estate, as the property will be sold when you die or move into long-term care, with the proceeds used to pay off your debt. This also means that you cannot pass your property onto beneficiaries.
You can read more about equity release in our article Equity release – what is it and how does it work?, or more about each kind of equity release product individually in Lifetime mortgages explained and Home reversion – what is it and how does it work?
When might equity release be an option for divorcing couples?
Equity release is being used by a growing number of homeowners wanting to unlock some of their property’s value for a variety of reasons. Some use the freed-up cash to fund their retirement or help their children onto the housing ladder, but others use the money to create financial flexibility during what is often a challenging divorce process.
For example, if one party wants to remain in the marital home but the other party can’t afford to move out, the couple could agree to take out an equity release plan. The leaving party could then use their funds released from the property to buy a new home. This way, both parties get some value out of the property that they own – one person is able to keep living there, while the other can use their equity in the home to fund a new place to live. It is worth noting however, that if there is an existing mortgage on the marital home, some of the proceeds of equity release must be used to pay this off first.
Another scenario could be that both parties wish to move out as soon as possible, but are unable to sell the property quickly. Equity release could allow them to access the value of their property upfront and use these funds to start making new arrangements.
If you’re looking to use equity release during the divorce process, you will need to inform the lender that you are separating and provide evidence of a final financial agreement. This should include plans for how the property is being dealt with and a “clean break” clause that separates your finances from your partner’s.
You must always seek professional financial advice before going ahead with equity release, particularly during a process as delicate and complicated as divorce. It can be an emotional process, and it’s vital to make sure that equity release is the right option for you or if an alternative option may be more suitable.
If you’re looking for somewhere to start, you can get expert advice from a Rest Less Mortgages equity release specialist. They are active members of the ERC and can advise on equity release mortgages from the whole of the market. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
What other options are available?
If equity release doesn’t appeal or isn’t the best option for you, there may be alternatives you can explore. We take a look at some different ways to split up a family home during divorce in our article Splitting the family home and mortgage during divorce, dissolution or separation. You can also learn more about your options for buying property after divorce in our article Buying a property after divorce.
Remember that even if the property is only in one party’s name, it is a “matrimonial asset” if it was purchased during the marriage and you both have the legal right to remain living there. One party cannot force the other to leave, even if they are the sole owner.
For more help with untangling your joint finances and possessions during a divorce check out our section on separating your finances.
If you think mediation could be an option to help you resolve things, visit the National Family Mediation website. More divorcing couples than ever are seeking ways to go through the separation process amicably, without the need for lawyers.
Alternatively, you can find a solicitor with the help of Resolution, a membership organisation for professionals who work with separating couples. All members commit to taking a non-confrontational approach to help couples resolve their issues.
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