01 Jun Here’s a New One: The ‘Divorce Mortgage’
Here’s a new one to me: the ‘divorce mortgage’. No its not some crazy, invented term to describe a financing vehicle (my mind went back to ‘plain vanilla swaps’ from the days when derivatives were the buzz), but rather exactly what it sounds like: a mortgage that suits people who own a home together but are getting a divorce. Right now it is a British phenomenon, but it certainly has the potential to spread through the rest of the world as well.
The divorce mortgage, as it is being proposed, would make it easier for one partner to buy out the other and stay in the family home if a marriage breaks down. As it stands now, if a couple divorces their assets, including any appreciation in the home since they purchased it, are split. If one partner wants to keep the house, they have to buy out the other. Given that that is often difficult to do, particularly if there has been a lot of home price appreciation, more often that not houses get sold.
As described in this piece from The Telegraph, with the divorce mortgage a financial institution would lend the partner who wants to stay in the home enough money to pay out their spouse. The bank would also lend an extra amount that would be used to pay interest on the loan. After the set period time is up, the borrower would either sell the asset and pay the lender back, or take over the mortgage themselves, assuming their circumstances had changed enough to allow them to do so.
Although I could certainly understand why this arrangement would be appealing to borrowers (particularly if they had children they did not want to disrupt) it took me a moment to see the appeal to lenders. After all, divorce mortgage or not, either partner in a divorce is always able to buy the other out and stay in their house, providing that they had the financial wherewithal to do so. If they cannot afford it, why would the lenders be interested in financing it? The appeal, however, is apparently that whatever interest rate they charge on the loan makes it worth their time. And of course if the borrower if able to refinance at the end of the period, everybody wins.
As a loan, the divorce mortgage would work well for someone who believes they can get on their feet within a few years and buy out the house, or at least be in a better emotional space to sell it. For someone whose circumstances did not change within the time period, it would just put off the day when they had to move, although that could work too if the object was simply to stay in the home for a reason like waiting until the kids got older.
Whether or not the divorce mortgage gets implemented in Britain or in North America, looking for ways to safeguard financial assets after divorce are worth discussing and not just in a personal finance context. The reality is that the ‘grey divorce rate’ (which these days mostly encompasses baby boomers) is uncomfortably high, and with each divorce comes a splitting of assets that cuts into the funds available to fund retirements. Given that the majority of baby boomers do not believe they have enough saved for retirement anyway, the income prospects of the next wave of retirees is rapidly becoming a macroeconomic issue.
If the divorce mortgage provided a window that allowed assets to be better preserved, that would certainly be a good thing from a big picture point of view. However, given that it would work best for those whose incomes are likely to rise the fastest in the years following a divorce (and hence allow them to refinance) it is not clear to me that the existence of the divorce mortgage would make much difference in terms of boosting assets. And of course if the home depreciated in value, holding on to it would have definitely proved to be the wrong choice.
The divorce mortgage may not be the way to go, but this is definitely a good time to thing about financial vehicles that allow people to preserve assets even if they cannot preserve their marriages. For some it might be better if they could do both, but from an economics perspective it will certainly be a lot worse if they end up doing neither.