How Equity Release Can Help with Divorce

elderly couple looking away from each other

It is an unfortunate fact that almost 1 in 2 marriages end in divorce. Married life often encompasses a lot of joint finances, whether one partner earns the bulk of the income or not. As a result, when people get divorced there is almost always going to be some form of division of assets.

In the divorce court, anything and everything that is classed as an asset will be taken into consideration before a settlement is reached. This includes pensions, savings, investments and also property. The good news is there are ways to make a divorce settlement a little more bearable and Equity Release can in certain circumstances provide a valuable lifeline.

Let’s explore how Equity Release can help with divorce further.

What is Equity Release

Equity Release is a specialist mortgage product available to homeowners aged 55 and over.

In order to qualify for an Equity Release product, the security property must be valued at £70,000 or more and the overall loan-to-value can normally not exceed 50%.

If you have a large mortgage on a property that you wish to take Equity Release on, it will need to be cleared on completion.

Types of Equity Release

There are two main types of Equity Release product available in the UK. These products are called Lifetime Mortgages and Home Reversion plans.

Lifetime Mortgages

The most common form of Equity Release is a Lifetime Mortgage. A Lifetime Mortgage allows you to borrow against the equity you hold in your property and the interest is rolled up, becoming payable upon death, or requiring long-term care.

Unlike a traditional mortgage you do not need to make monthly payments although if you want to pay down the debt you are able to make voluntary payments with most lenders.

There are many safeguards in place with Lifetime Mortgages now, which make it one of the most regulated, yet flexible, financial products in the mortgage market.

Home Reversion Plans

A Home Reversion Plan is different to a Lifetime Mortgage because the lender offers to buy the equity you hold up front and there is no interest that rolls up.

Although this is ideal for some people, only 1 in 10 Equity Release products taken are Home Reversion Plans because the value a lender gives on your equity is often substantially under market value. For example, if a property is valued at £200,000, a provider may offer £50,000 for 50% equity in the property. This means that they are immediately in profit for £50,000 as a 50% share is valued at £100,000. If the property increases in value, they will also benefit from this capital appreciation. This differs to Lifetime Mortgage providers where the provider never owns any portion of the property.

Alternatives to Equity Release

If you do not qualify for an Equity Release product you may want to consider a traditional remortgage. The reasons for borrowing on a remortgage are more limited compared to Equity Release and you will have different criterion to meet such as an affordability check.

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Can I Use Equity Release for a Divorce Settlement?

In theory yes, an Equity Release can be used for a divorce settlement. This is because lenders do not stipulate how you spend the money you receive from an Equity Release – as long as it is not for illegal activity.

The practicality of using Equity Release in a divorce settlement is quite different and it will largely depend on your individual circumstances whether it is appropriate to consider.

For example, in most cases a property will be locked into the divorce settlement and a judge might not allow you to release equity if they feel it will be detrimental to the process.

During divorce settlements, judges will often request a Mortgage Capacity Report to assess your mortgage affordability. These reports can be used in the process for determining a fair settlement. If you qualify for a Lifetime Mortgage product, you should expect these options to be covered in the report.

Can I Use Equity Release to Buy Out my Ex-Partner?

As mentioned above, you can potentially use Equity Release to buy out your ex-partner.

However, this is more complex than using Equity Release to pay a divorce settlement. This is because presumably you will own the property jointly and before you conclude the divorce proceedings will want to release the equity you hold to facilitate the buyout.

Considering you are buying out an ex-partner who is on the mortgage, they will be entitled to a portion (equal to their ownership amount) of the Equity Release funds. You will need to ensure the money you are releasing and is personally due to you is substantial enough to make the buyout.

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Can I Use Equity Release to Purchase a New Property?

With divorces where one person wants to retain the property and the other needs to find a new home, Equity Release can be used to either purchase a property or as a deposit on a new home. A Lifetime Mortgage can also be secured to a new property purchase.

This arrangement will need to be outlined in full before you reach a divorce settlement and both parties will need to agree. For example, it could be beneficial for your ex-partner to accept that they remain in the current property until they pass away or need long-term care and in return agree to release equity and provide you the full funds to buy an onwards property.

There is nuance involved though as your ex-partner will likely be entitled to some of the released equity and may not be amenable to an arrangement whereby they forfeit the funds for you to buy a new house.

Speak to an Equity Release Specialist

Divorce proceedings are complex already and Equity Release itself is an intricate product. This means there are layers of complexity to unpack and decide if it will work in your divorce proceedings or not.

In some circumstances Equity Release can work well with divorce proceedings. Equally, there are times when Equity Release would be detrimental and cause significant financial hardship when packaged into a divorce settlement.

For this reason, you must seek specialist advice about Equity Release and use a broker who understands the intricacies of divorce settlements.

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Broker. Boon Brokers provides fee free mortgage and Equity Release advice.

Contact Boon Brokers to book your Equity Release consultation today.

Gerard BoonB.A. (Hons), CeMAP, CeRER

Gerard is a co-founder and partner of Boon Brokers. Having studied many areas of financial services at the University of Leeds, and following completion of his CeMAP and CeRER qualifications, Gerard has acquired a vast knowledge of the mortgage, insurance and equity release industry.