Figuring out how to pay for the changed living arrangements that follow separation and divorce is a key issue in most cases we deal with. When you divorce, what was a shared household splits in two with all the knock-on financial consequences that brings. Discussions often become fraught with questions being asked about what share of financial responsibility each spouse should bear to house the family.
When completing Form E (financial disclosure), you must show your housing needs and resources. If you want to stay in the family home, buy out your spouse’s share in it or relocate to a new property with your children you need to demonstrate to your ex (and a judge) that your proposals are financially realistic. A Mortgage Capacity Report is a useful way to do this.
Mortgage Capacity Reports are also one way to take the heat out of discussions about a financial settlement. They are independent assessments of the borrowing power of each party. Once financial capacity has been established, a more practical approach can be taken in relation to new housing arrangements – whether one spouse intends to remain in the family home, or a new property needs to be purchased.
The information needed to prepare a Mortgage Capacity Report is similar to details that lenders will request before issuing a mortgage
Who prepares a Mortgage Capacity Report?
Unlike your obligation to disclose your assets on Form E, a Mortgage Capacity Report is not a requirement in family proceedings. Usually, one spouse’s solicitor will suggest obtaining a report from a financial or mortgage advisor where the circumstances of the case merit it.
The report can be carried out in respect of one spouse or both. Sometimes it can be useful to obtain what’s known as a ‘No Mortgage Capacity Report’ to confirm that one party would be unable to secure any kind of lending. When requesting a report, it’s important to brief the advisor carefully. Often the report will run through a number of different scenarios, factoring in future changes in financial commitments, including the possibility that earnings will increase or child maintenance costs will reduce. When the report is produced it will normally be shared between both sets of solicitors to facilitate further discussion on a financial settlement.
What does a Mortgage Capacity Report Cover?
Reports will always depend on the facts of a particular case. Most reports should include details of:
- Income – An assessment of the future borrower’s current sources of income, such as salary, self-employment income, rental income, or investments. Maintenance payments due under the final divorce settlement will also be relevant here.
- Debts – The report will analyse the borrower’s existing debt obligations to determine the borrower’s debt-to-income ratio (DTI).
- Credit History – A borrower’s credit score and credit history will be obtained to assess how much credit a borrower can comfortably take on.
- Deposit – The report will factor in how much of a deposit will be paid in any purchase and assess how that impacts the amount a party can borrow.
- Monthly Expenses: The borrower’s monthly expenses, including utilities, insurance, and council tax will all be factored into the analysis
The report will conclude with a statement of how much a spouse (or both spouses if it’s a joint report) can afford to borrow.
Is A Mortgage Capacity Report Always Needed?
A Mortgage Capacity Report is not a requirement – you aren’t obliged to provide one as part of the Form E financial disclosure process. It’s a tool to assist in negotiations and to help clarify how housing costs will be met post-divorce. If you are intending to rent a property after divorcing you won’t need a mortgage capacity report. Similarly if the financial settlement will involve the transfer, mortgage-free, of a property for you to live in, a report will be unnecessary.
When Should I Get A Report?
It’s important to consider when the best time to commission a report is. Evidence about housing needs must be provided to the court in a timely manner. (The 2019 case of AR v ML demonstrates the consequences of not doing so.)
If, however, you are still unsure of your work situation post-divorce or there is no clarity about maintenance you will receive in future, getting the report done too early could be misleading and unhelpful. And bear in mind a report that confirms you have a high borrowing capacity could jeopardise negotiations. Your spouse could argue that they should be able to pay less towards your future financial needs. In scenarios like this it’s important to discuss the best timing for a report with your solicitor.
Mortgage Offer in Principle v Mortgage Capacity Report
A Mortgage Capacity Report prepared during financial remedy proceedings differs from the more routine Mortgage Offer (or Agreement) in Principle in several ways.
An Agreement in Principle is more specific than a report into capacity. It comes from one lender and, while not binding, is a clear indication that the lender will agree to release a certain amount of secured lending to you.
A Mortgage Capacity Report on the other hand is more advisory in nature. It does not come from a particular lender and does not indicate any kind of immediate approval for a certain level of borrowing. Instead it’s a survey of the whole market and outlines, in theory, what you might be able to borrow against the backdrop of your new financial circumstances post-divorce. For this reason a Mortgage Capacity Report is likely to be more detailed than an agreement in principle, outlining various scenarios applicable to your situation.
In summary the Mortgage Capacity Report demonstrates to the court, your solicitor and your spouse’s legal team roughly what you can afford. The Agreement in Principle comes into play further down the line, when a settlement has been reached or an order made by the court and you are ready to proceed with purchasing a property or remortgage your existing home.
Comment
The primary goal of a mortgage capacity report for divorce is to provide clarity and transparency regarding each spouse’s ability to secure suitable housing and manage mortgage related financial responsibilities after their divorce. This information can be valuable for negotiating property division, spousal support, and other financial aspects of the divorce settlement. If negotiation fails, the independently produced report can be used as a reliable reference point in court proceedings. Remember that the courts are more likely to accept a report that has been prepared by an independent, FCA-regulated advisor that is based on up-to-date lending criteria.