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Mortgages in a difficult market: Practical pointers on equity transfers and capital adjustments.

Keith Farrell, Independent Mortgage Adviser, and principal of Figtree Mortgages in Bristol, looks at ways in which clients’ chances of approval for a mortgage can be increased in a climate where it appears lenders don’t want to be lenders any more, and where seemingly innocuous “history” can cause havoc with credit profiling.

image of Keith Farrell, Fig Tree Mortgages

Keith Farrell, Principal, Figtree Mortgages

Separation, Divorce, and Mortgages
Mortgages very often have a part to play in a separation or divorce. Given that the matrimonial home is probably the biggest asset that many couples own jointly, then some kind of adjustment or equalisation of shares of its value is almost inevitable in many financial settlements. Add to that any second homes, holiday homes abroad, and rental properties including some perhaps bought as accommodation for student children and their housemates, and you could be looking at a substantial portfolio of property to negotiate over.

Selling property and simply splitting the proceeds in the proportions agreed in a settlement may be one obvious way of dealing with jointly owned assets and moving forward, but there are downsides to consider – particularly in a poor property market. Would there be early redemption penalties to pay if mortgages were cleared off? Would a desperate sale now mean a substantial loss, particularly if the property was only purchased in the last few years? Could there even be a negative equity situation? And then there will be fees and costs to pay. 
 
If properties – usually the matrimonial home - are being retained by one or other party, then some kind of property adjustment will come into play. For matrimonial homes the desired outcome, assuming no sale, will often be either  “just get their name off the deeds so it doesn’t appear on my mortgage statement” or “you pay me a lump sum of £X and the house can be transferred into your sole name”

In both of these scenarios, for many clients, dialogue with a mortgage lender is going to have to take place. This may be asking the existing lender to take one of the parties off the mortgage (and possibly adding a new partner at the same time) or it may mean a mortgage application to a new lender altogether. An independent mortgage adviser can help in this process by finding the most appropriate solution for the client’s particular circumstances, and by assessing whether what is on offer from the existing lender can be bettered elsewhere.

The lender’s viewpoint
Think about the first scenario – a client is going to the lender and asking them to take away a major part of the security they have for that mortgage loan. The client may be thinking “well I’ve always made the mortgage payments myself without any help from my partner”, but that is not the way the lender will view things. The loan will have originally been granted to two people, each probably with their own income, and now the lender is being asked to give away their right to pursue one of those income earning people if ever the mortgage fell into arrears. And the loan security – the house -  may have dropped in value by 20% since the mortgage was taken out 18 months ago. This is where presenting the case in its best possible light becomes key, as well as knowing which lenders will do what according to their “lending policy”.

A lender – and anyone advising a client about their mortgage – is under an obligation imposed by the Financial Services Authority (FSA) to make sure that a mortgage is affordable for that client. Lenders have various ways in which they can demonstrate that they take this responsibility seriously – for example one major lender has just issued guidelines saying that customers must budget as if their mortgage payments were being charged at 7%, even if their current payrate is substantially less than that. Many lenders have rules on what type of income they will accept as “available” or “guaranteed”  to put towards an affordability calculation for mortgage purposes – maintenance from an ex-partner or spouse is a prime example of this, as are tax credits and child benefit. Some lenders will accept them, some won’t – or only in certain circumstances.

Whilst demonstrating affordability is a pre-requisite of good client care, and central to the FSA’s principles of “Treating Customers Fairly” which the Financial Services Industry as a whole must demonstrate is embedded into their everyday practices, mortgage lending decisions are also based on wider client and security profiling, and this is an area that clients and their legal advisers can influence, particularly by taking good care of their finances, which can sometimes be something that slips at a time when a personal relationship is deteriorating.

When I was cutting my teeth in the industry with a major mortgage lender some 20 years ago, underwriting mortgage applications and justifying lending decisions, I learnt – and always remember – some basic principles about what makes a good mortgage decision (perhaps some have forgotten these basics over recent years!) Firstly there is the client themselves – can they pay (the affordability test) and will they pay? Then there is the property – after all a mortgage is a loan secured on property: is the property readily and quickly saleable, or is it too quirky, or defective in a way, either in condition or title, that would hinder saleability? And when it sells will there be sufficient sale proceeds to clear the loan?

20 years ago many lenders still used individual assessment of applications, coupled with a credit search, to make a lending decision – the “can pay / will pay” part of the equation. Now the credit search is all part and parcel of more complex profiling systems, the precise nuts and bolts of which are as closely guarded as the Coca-Cola formula, although one major lender did recently remind mortgage advisers not to forget to enter a home landline telephone number on applications, as this might adversely affect credit scoring!

Whist no profiling system however sophisticated can truly predict whether a mortgage applicant will pay their mortgage or not, the client’s previous credit history is the best indicator there is of how seriously they take their financial responsibilities, and the slightest slip-ups can be damning, especially in the current reluctant lender market.

How clients can help themselves
From the mortgage-obtaining point of view, the areas where clients can take steps to improve their own credit ratings are:

The above points are all preventative measures to stop people being caught out by blemishes on their credit files. There are also some steps that clients can take proactively to improve their overall risk profile from a lender viewpoint, or at least to speed the application process up, and make the administration part easier, given that they will have enough stress in their lives dealing with the implications of a relationship breakdown. These will be of particular use if the client is advised to make an application to a mortgage lender who will view individual cases on their merits ( yes there are still some mortgage lenders who do not credit score applications ). They are:

All the above are pointers to how clients can make the process of obtaining a new mortgage, or altering the terms of an existing one, that much easier as they deal with the practicalities of equity adjustments. In some cases adherence ( or not ) to simple prudence and good financial housekeeping may mean the difference between the ability to secure funding for the proposed rebalancing of property ownership, and having to re-negotiate the whole settlement again, with perhaps the underlying unpleasantness of “should have tried harder to obtain a mortgage “ allegations from the other party.

A word about equity
We have looked at the lender perception of “can pay / will pay” and touched on the nature of property as security for a mortgage, but equity itself plays a key part in the willingness of lenders to offer mortgages on competitive rates. The advent of the credit crunch has seen a well-publicised dramatic reduction in the overall number of mortgages on offer, and a huge cull of high loan to value products. 60% is the new 80% - in other words where 18 months ago a lender offered its most competitive  products to those with a 20% equity stake in their property, that privilege is now often reserved only for those with a 40% or even 50% stake – and of course the overall value of the property may have reduced significantly as well. A party having to start again after a divorce or separation and buy a property with little deposit will find a higher rate payable on 90% borrowing, and – with a few very limited exceptions – almost no mortgages are available with a deposit smaller than 10%.

What this may mean for clients’ legal advisers brokering settlements is the need to look at ways to keep borrowings low in percentage terms to benefit from the best mortgage products. If there is a portfolio of properties there may be some switching around of equity and mortgages to be done to achieve the least costly overall solution, and a good independent mortgage adviser should be willing to work with lawyers and their clients to look at different possible scenarios as a financial settlement is shaped.

Conclusion
We have seen how mortgages are often fundamental to facilitating capital adjustments and transfers of equity, and a client’s mortgageability may sometimes be the determining factor in whether there can be any immediate capital / equity transfer at all, or whether a deferred settlement is all that is possible pending the eventual sale of a property once children reach adulthood.

In negotiating settlements, the clients or their legal advisers should consult an independent mortgage adviser early on in the process, to avoid agreeing settlements that are then frustrated by lack of available mortgage funding, and to carry out a feasibility check on proposed solutions. The clients should also take advice on protection for their mortgage in the event of death or ill health, and ensuring monthly mortgage payments are met if they lose their income – both earned and other income such as maintenance from an ex-partner.

Especially in times such as the current credit crunch, when mortgage availability is reduced, clients can take steps to improve their chances of being approved for mortgage finance, often through basic financial good practice. With divorce generally being acknowledged as one of the most stressful events in life, worrying about whether a mortgage application is going to be approved or not is one extra burden that clients can do without.

Figtree Mortgages are Independent Mortgage Advisers.

Your home may be repossessed if you do not keep up repayments on your mortgage.

You can choose how we are paid: pay a fee, usually 0.5% of the loan amount, or we can accept commission from the lender.


 


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