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Divorce financial planning and interest only mortgages

A bridge too far? Interest only mortgages

There is a worrying report from the Financial Conduct Authority (FCA) about interest only mortgages.  With an interest only mortgage you pay off the interest on the loan each month but nothing towards the capital you have borrowed at the end of the term.  If you do not have a savings plan to meet this capital payment at the end of the term, which could be at the point of retirement, you will be in trouble.  The report refers to some 2.6 million interest only mortgages coming to maturity between now and 2040.

The aspect of the report that struck me, is as follows:

More worryingly, it found some people were “underestimating the problem”: 37% of those quizzed reported a definite or possible shortfall between what they will have to pay the lender when their mortgage term ends, and what their savings, investments or other strategy will deliver. And borrowers who were able to give a figure believed their shortfall would be, on average, £22,000. But when financial modelling was carried out, the proportion who may not have enough money to pay off the loan jumped to 48%, and the average shortfall was “considerably higher”, at £71,850. That sum is approaching half the average £162,000 house price in England and Wales.

An article on the FCA’s report can be read in The Independent.

What now for interest only mortgages?

As a family lawyer specialising in financial settlement I want to know how my advice today will affect my clients in 10, 15 or 20 years’  time. I normally take a dim view of the opposing lawyer who suggests that my client should consider interest only mortgages when I know she will not be able to build up savings in the future on her present or predicted income.  As readers of my blog will know, I think that ‘reality-testing’ any proposals for settlement on divorce or separation is crucial.  One way to do this is to make sure that financial planning advice has been obtained.  The financial modelling referred to in the FCA report is precisely the advice I import for my clients so they know exactly where they will stand in the future if they accept a settlement proposal.

It does not mean that interest only mortgages would not be right in some situations, but I fail to see how a client can make an informed decision today if they are not being assisted to look at their financial health tomorrow.

If you do find yourself facing a shortfall then consider some of the options in this useful article in The Guardian.

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