Equity Release Advice

Silver Splitters and Equity

what is equity finance?

While the popular image of retirement is a happy couple enjoying their silver years together, the reality can be very different. Once children are grown up (or close to it), couples may find that their only significant connection is broken and that they would prefer to part company and spend the remainder of their lives on separate paths. Emotionally, this may be a fairly straightforward decision, financially, however, it can be rather more challenging.

Property and pensions can be hard to split

Property and pensions are often the biggest assets in any divorce situation and dividing them legally and fairly can be a challenge. Property is a particular challenge for two reasons. Firstly, it's a tangible asset and secondly there is often still a debt attached to it (a mortgage), which has to be paid back one way or another. In practice, this means that one of four things has to happen.

The house has to be sold

This isn't necessarily a bad option, especially if children are grown up. When there are still children at home, however, it can be very much preferable to keep them in one place, even if they are almost (legally) adults, since they will probably be of an age where they will be taking exams of some sort, the results of which could make a major difference to their lives.

One partner has to buy the other out

This does not necessarily mean that the one partner literally has to go through the full process of buying the property, it may well mean that one partner will accept the family home in lieu of other assets, such as a share in a pension fund. It can, however, mean, exactly that, in which case the partner who stays has to be able to obtain and service a mortgage in their own right. In this context, it's worth noting that lenders may not take child support into account when calculating affordability.

The existing mortgage has to continue to be paid as usual

It is not necessarily impossible to continue to service the existing mortgage, however it isn't necessarily straightforward either and it certainly isn't necessarily desirable. Leaving aside the fact that both halves of the couple will presumably wish to move on with their separate lives, there's also the fact that a divorce is the sort of situation which can throw finances into turmoil and lead to mortgage defaults which could, ultimately, result in repossession. Having said that, if there is only a short period left to run on the mortgage, then this might be a practical option.

Equity has to be released from the property

There are basically two ways to release equity from a property. One way is simply to get or extend a standard mortgage, i.e. one which is repaid during a person's lifetime. In this case, however, the person taking out the mortgage has to be able to service it from their own income, possibly excluding child support, which once again raises the issue of affordability.

The other way is to use an equity-release scheme to obtain either a lump sum or an income. A lump sum could be used to buy out the other owner, an income could be used to service a mortgage to completion. In either case, the borrower would not need to make repayments during their lifetime (although some equity-release schemes allow them to do so if they wish). They could then continue to live in the property until their death, at which point it would be sold to pay back the loan, plus interest. These days, equity-release schemes may also include options for those who decide that they wish to downsize later and/or people who need to move into permanent care.