Mortgage Capacity Assessment Reports & Expert Financial Guidance
Divorce is an incredibly stressful and emotional experience. To achieve the best outcomes, it's important for various professionals to collaborate and offer support.
We have extensive experience in producing mortgage capacity reports for use in divorce proceedings. We understand what information is relevant to the decision-making process and how to handle this sensitive topic.
The mortgage capacity report is intended for you and your trusted advisers to demonstrate mortgage borrowing capacity, facilitating a fair division of assets. We take the time to thoroughly discuss all details with our clients, their solicitors, and their financial advisers to ensure our assessment is fair and accurate.
From April 2022, mortgage capacity reports became mandatory for all court cases. We completely overhauled our process and the structure of our report, working with family solicitors and financial advisers to ensure that the content was relevant and concise in all cases.
When it comes to the mortgage capacity report, we must be unbiased and provide a fair assessment of mortgage borrowing. This may include multiple scenarios, or there may be no mortgage capacity at all.
We regularly work with Evelyn & Partners and their Family Team. We interviewed Lucie Spence, Partner and Director of Financial Planning at Evelyn & Partners, and asked her some questions about the topic and why the reports are important. This collaboration shows how our advice and theirs are closely connected and how we support each other in delivering excellent customer outcomes when they are most needed.
-How does a mortgage capacity assessment assist with wider financial advice in the divorce process?
Lucie: It can support the wider conversation around how much an individual would need to deposit to buy the home they are considering. It also supports the conversation around what type of house an individual can afford to purchase and the potential running costs of this property. When supporting lawyers with agreeing on a financial settlement, we go through a cashflow plan with our clients and we factor into this the level of expected borrowing and the potential interest rates to show whether this is affordable for clients. Also, it supports financial advisers in advising on a split between borrowing and investing and the right balance between the two. Should an individual wish to buy out their ex-partner from the marital home we can show the financial implications of this both in the short and longer term.
Jess: When going through a divorce, it's important to consider various outcomes. Factors such as the amount of deposit available, potential child or spousal maintenance, and cash flow planning are crucial. If one party wants to buy out the other from the family home, we can include this in the report to ensure affordability. Our reports can present different scenarios alongside cash flow analysis to illustrate the overall financial picture for the client. This helps in understanding how a mortgage loan will impact the individual both now and in the future, allowing for a fair division of assets to be agreed upon.
-What wider financial planning objectives do you consider for clients going through a divorce?
Lucie: Cash Flow planning should demonstrate how the settlement could be used to provide income or lump sums now and in the future. It also supports showing the settlement's value for the individual in terms of how long it will last at their proposed rate of spending. Financial education is vitally important for clients, and this is one of the foundations of the advice we provide. Many clients I work with have never managed their finances, so we start by talking them through the basics. Protection to cover maintenance and children costs and to replace what has potentially been lost through the divorce. Many clients have their spouses covered through their work benefits in terms of life cover, income protection or critical illness, but this is then lost when the divorce goes through Pension provision to ensure clients are making the most of their pension contributions Child Benefit ensures that the right party is claiming this benefit to ensure national insurance credits are continued. Loan repayments where possible to try and support clients to start the new chapter of their lives Investment advice, either advising on existing investments and ensuring they are structured in the right way or advising on a new cash lump sum which may have been received as a result of the divorce due to pension offsetting or a capitalised maintenance lump sum Implementing pension sharing orders which have been agreed through the court. We also have defined benefit transfer specialists who can advise when a sharing order is placed on a Defined Benefit scheme. Should the individual own a business we can provide support and advice around their options so that informed decisions can be made. Provision for children’s education
Jess: All of these broader financial planning goals will influence how we assess mortgage capacity. Factors such as education expenses, investments, and other sources of income will all affect an individual's borrowing potential. It is essential for us to comprehend how these factors will impact future mortgage capacity assessments.
-What other essential advice can you offer clients who are going through divorce and how do you help and support them in the aftermath?
Lucie: Untangling finances during a divorce can be emotional, and decisions that are made can have a long-lasting impact. Often, individuals effectively ‘pay off’ their other half just to move on with their lives and then regret this decision later when the implications become apparent. Engaging with clients as a financial adviser early on can support them in not making knee-jerk emotional financial decisions. For some clients, this may be the first time that they have managed their money and have a lack of understanding around investments or pensions. This is where we can really support financial education and the explanation going forward. We can also support the tax position when the assets are split, and the spousal exemption applies. We would also support clients going forward with their new lives and work with them to adapt their financial plans when their circumstances change. Generally, our clients have a long-term relationship with us as their financial advisers (many of mine have worked with me for over 20 years) and will meet with us at least on an annual basis, and we become their trusted advisers, often going on to advise their children.
Jess: The first time people inquire about how much they can borrow for a mortgage can be a new experience for them. For us, it's not just about creating a report for the court but also providing support afterwards. We prepare reports indicating that there is no mortgage capacity at all, which can be surprising for some people. Therefore, it's important for us to support and educate them, explaining how and why we reached our conclusions so they can move forward confidently and with understanding.
-How can this information prove valuable in negotiating a divorce settlement's property division, spousal support, and other financial aspects?
Lucie: Working with legal professionals & using the mortgage capacity report to understand how much an individual can afford to buy a new property and ensure that they have enough income or capital to fund their lifestyle going forward is an important part of the process. We can also help to discuss with the client whether or not this is realistic over the longer term or whether they need to have a larger settlement, borrow less or reduce their outgoings. Should an individual receive a capital lump sum instead of ongoing maintenance, we can calculate the capital amount depending on the client's risk level. We also work with clients' legal representatives to determine how much income can be generated from varying lump sums. We explain the value of money to individuals and evidence how much disposable income they would have depending on the mortgage level they take out and the impact of rising or falling interest rates. This can then support the clients and legal professionals with the negotiation, and we can run the calculations required depending on their requirements. It also shows where suggested settlements are not affordable to an individual and the impact on them in later years. For example, when an individual keeps a marital home but doesn’t have any pension provisions, we can work with them to understand the changes that will need to occur in their later years to afford their retirement.
Jess: The first part of the report emphasises the importance of taking into account various aspects when undergoing a divorce. It underscores the significance of professionals working together to provide the required information for a fair evaluation of the situation and the division of assets.
We are committed to providing personalised, compassionate customer service at the heart of everything we do at Anderson Harris. Divorce is a challenging time for everyone involved, and we strive to offer necessary support in a timely and sensitive manner. Many of our clients initially approached us for a mortgage capacity report and have since become long-term clients. We also collaborate with their other professional advisers. If you would like to discuss any of the topics mentioned in this blog, please reach out to us. We are more than happy to assist in any way we can, including providing referrals to relevant services.