The “Mini-Budget” and Divorce: What Now?
The Liz Truss premiership lasted only 44 days, but her government’s ‘mini-budget’ announced on 23 September 2022 is likely to have a profound effect on the country for many years.
Already you may have noticed how this has begun to affect your day-to-day finances: on top of the increased costs of food and energy, many are now seeing significant increases in their mortgage payments and the loss of value in investments, including their pension funds.
The results of the government’s interventions have been so rapid and consequential, that previous certainties in relation to finances that we as family lawyers rely on, have now become potentially problematic. If you are in the process of trying to resolve finances on divorce, it is likely that the outcome you had been working towards has been affected and it is therefore necessary to take a step back and reassess. Below are three areas which are key to resolving financial matters that have possibly been affected in recent weeks.
It is certainly true that all household budgets have seen a significant cost increase as a result of higher food and energy bills over the last six months. For those on a variable rate mortgage, or those due to take out a new fixed rate mortgage, the difference between the two payments is a hugely consequential sum. As of Wednesday 13 October, rates on two-year fixed mortgages rose to 6.46%, a rise of almost 4% from the rates many will have enjoyed over previous years.
When resolving finances, being able to properly capture the expenses each party will incur is key to establishing how these costs, known as a party’s ‘income needs’, will be met. Income needs are now likely to be far higher than originally anticipated and unfortunately, in most cases, household income is simply not keeping pace.
The impact on issues such as spousal maintenance should also be considered, both in instances where a party is seeking maintenance, but also where a maintenance order is already in place, as calculations as to income needs may now be out of date. Not only this, but the individual making spousal maintenance payments is now likely to have less disposable income available to provide support where needed, placing tension on both ends.
As a starting point, it is important to review your monthly/yearly outgoings in light of the changing circumstances and be clear as to what it is that you require to meet your income needs. The court will seek to ensure both parties’ reasonable income needs are met, and anything not included within your income needs schedule submitted to the court or in voluntary disclosure may not be considered. You should also give some thought to how you could possibly meet some or all of your income needs. These can then be discussed with your solicitor.
It is important to seek specialist advice when it comes to pension assets, which can be extremely complicated and complex. Particularly as a recent sell-off in government gilts has led to instability within certain pension schemes. Pensions often represent a large proportion of the matrimonial assets available for sharing and therefore, it is imperative that expert advice is received at an early stage.
When considering pension sharing on divorce, you must obtain a cash equivalent value (CEV) for all pension assets. This will assist in settlement discussions. Given the impact the mini budget has had on investments, it is also imperative that the CEV of all pensions are up to date. These valuations can often be obtained free of charge once a year from your pension provider.
The increase in interest rates will likely have a considerable effect on the housing market which could be far reaching. For many going through a divorce, the family home is often the main asset to be considered. One of the court’s main priorities when assessing potential outcomes is to ensure that each party (and in particular any children) has their housing needs met. Consequently, it is important to understand each party’s mortgage capacity.
For anyone who had obtained a mortgage capacity report in recent months to support their position, this is now likely to be out of date and will need to be reproduced. Of particular concern is that there are many people who had previously been negotiating based on their ability to borrow a certain amount, who will no longer be eligible as a result of banks tightening their lending criteria. This could have a substantial impact on those who previously thought they could purchase their spouses share in the family home. Inevitably, this is going to have a knock-on effect with regards to the division of capital. As mentioned above however, the first priority will be to rehouse any children of the family in stable accommodation.
In addition to this, with warnings about a drop off in prospective buyers, it is possible that house valuations, previously inflated by lack of available housing, will begin to drop as buyers are unable to borrow as much. This may, in turn, slow the process of resolving matters as properties spend longer on the market and sell for lower than expected.
For those who have investment properties, similar problems are present. As well as the risk of a drop in value (possibly putting any properties with buy-to-let mortgages into negative equity) it is also plausible that there will be a change in Landlord rental returns. It is unclear which direction this will go, as renters are already squeezed by record rents and the cost-of-living crisis, but they are equally unable to purchase their own property due to market conditions forcing them to continue to rent.
It is clear, in any event, that fresh valuations for any properties will need to be sought unless they are very recent, whilst any mortgage capacity reports more than a few weeks old are no longer reflective of the true position.
Whilst the above is not applicable to every individual circumstance, it is clear that the consequences of the government’s announcements have created a situation where many presumptions we could previously make surrounding an individual’s capacity to borrow or meet their needs no longer apply. The first step will be to reassess your position with your solicitor and establish what has changed and what tangible impact this has, with a view to discussing your options.
If you require legal help or advice, our experienced family law team are here to assist you so please do contact us on 0118 951 6200 and ask to speak to a member of our Family team.