• Phone: 0330 999 0959 | Email: admin@mediateuk.co.uk

    The impact of falling house prices on your divorce

    How does the falling house market impact my divorce?

    Sorting out the finances on your divorce and the property market have always been closely linked, in my opinion. Many clients will wait until they have put the house on the market, or even exchanged contracts, before they start to resolve the finances on their divorce or separation.

    Over the past 13 years of helping clients with their divorce finances, I have seen property prices increase and fall and I am convinced that the number of divorces, or at least the number of financial discussions around a divorce, are strongly related to the state of the UK property market.

    The Current UK property market

    I am by no means an expert on the UK property market and you can easily find different opinions on what the current state is and what the future holds. However, a quick monitoring on Rightmove shows asking prices are generally falling. In fact of the 150 properties that came up in my search area, none have increased in price in the past 6 months. If you follow the extremely personable Charlie from https://mhwc.co.uk you will see his passion for realistic pricing to help a subdued market. He is well worth a listen to or follow on X, if you are looking to buy or sell a property this year.

    How does a falling market impact my divorce?

    Valuations

    Typically, to value a property on divorce you will do one of three things:

    1 – Agree the price between yourselves.

    This is usually where a property has just been purchased or has been sold but not yet completed. You can of course just agree the property valuation between yourselves in any situation, but you both need to be happy that the valuation is accurate.

    2 – Get 3x estate agent valuations and take the average of three.

    This is the most popular method used. Why three? Valuations can vary substantially from agent to agent. On a recent client’s property, we had a top valuation of £1.2million and a lower one at £900,00. That’s a substantial difference. (The property finally sold for £955,000). For the valuations, you should ask the agent for realistic selling values – not an initial asking price. And do not use online valuation tools such as Zoopla as they can be wildly out on the true valuation. The average of 3 x estate agents (who have visited the property in person) will usually be accepted by the courts as the current valuation of a property

    3 – Pay for a valuation.

    You will usually jointly instruct a chartered surveyor to give a value for a property. This valuation will be accepted by the courts as the true value of the property. You only need to instruct one chartered surveyor. Prices will vary depending on the property, but costs will be upwards of £750+VAT.

    A chartered surveyor will provide a full valuation report. This can be helpful for particularly unusual properties where there is little to compare with on the market.  Or it is used where you are unable to agree the value by one of the other methods above.

    The value of the property will be entered on your financial disclosure or your Form E and ultimately will go on a Form D81, if you are hoping to get a financial consent order, that makes your agreement legally binding and can provide a clean break.

    Falling house prices

    Where property prices are falling, the valuation you agree and then subsequently base your full financial settlement on, can affect everything. If you look at the below example. A house near where I live in the Southeast has dropped in price by £150,000 in just 3 months of being on the market.

    Graph depicting falling house prices

    This may not matter as much if they agree that the property is to be sold and the proceeds divided equally, but as we know, family law is all about future needs and not necessarily an equal division. If getting £150,000 less for a property means one of the parties can no longer afford to buy a suitable property for themselves, then the whole deal may have to be renegotiated.

    Similarly, if the property is not being sold, but perhaps being offset against a pension or other investments, then the deal agreed may no longer be fair as one-half of the agreement has suddenly devalued by £150,000.

    Changing Valuations as the divorce progresses

    The information you enter on a D81 form has to be correct at the time of signing. This is very important, as you will be signing a statement of truth to say the finances are accurate at the point of signing the form. If you had based your valuation on the initial asking price of the above property, but subsequently are aware that the value has fallen by £150,000, then you need to put in the lower value as you could be committing contempt of court otherwise.

    Impact of decreasing valuations

    • You may need to update your financial disclosure and possibly more than once
    • You need to check that you can both afford to meet need, if a property drops in value. The flip side to this is that in a falling market, the property you are intending to purchase may also be dropping in value.
    • Check that any offsetting agreement is still fair. If a property has dropped in value by £150,000 but the other parties’ investment has increased in value by £50,000, a court may see that is not a fair split when looking at granting your financial consent order. Instead of both having assets valued at £800,000. Suddenly one of you had an asset at £650,000 and the other one worth £850,000. A court may want to know why the discrepancy.
    • Mortgage capability. You need to check that your mortgage offer is still valid on any property you wish to purchase, as a reduced value could affect the loan-to-value (LTV) and impact your ability to secure a mortgage.
    • You may not be able to sell the property at the price you initially hoped for and will need to work together to sell at a price that allows you both to move on
    • If looking at a Mesher Order, where you are deferring a sale until a later date, for example when the children are older, it may increase your capital gains tax. You should always take financial advice on such a situation

    GET IN TOUCH TO FIND OUT HOW MEDIATE UK CAN HELP WITH YOUR PARENTING OR FINANCIAL DISPUTE, OR WITH A DIVORCE OR SEPARATION.

    CALL 0330 999 0959 OR CLICK HERE FOR A FREE 15-MINUTE CONSULTATION

    Options to sort out a property on divorce

    You have 10 options to consider when sorting out a property on divorce. The impact of falling house prices will vary depending on which of these options you take.

    Here we take a look at the most popular options and consider how falling house prices would impact the divorce settlement:

    1. You are selling the property now and both buying a property
    2. You are offsetting the property against other assets, such as a pension
    3. You are keeping the property now and selling at a later date (eg a Mesher Order)
    4. One of you is keeping the property and the other is renting to maintain a home for the children
    1 – You are selling the property now and both buying a property

    It is common for a property to be sold and divided between the two parties. For example, where a couple have a 4-bed house and one child who stays with them both. They have similar incomes and therefore both need a 2-bed property. Falling house prices means they get less for their 4-bedroom house, but hopefully gives them more options to buy a 2-bedroom place each.

    Falling house prices may not have too much of an impact on them in this situation. However they need to look closely at the local market and see whether larger properties (eg 4 bedroom houses) are reducing in price more than 2 bedroom properties. Anecdotally, this is the situation in many areas of the country.

    2 – You are offsetting the property against other assets, such as a pension

    This is where falling property prices can significantly impact your divorce settlement. Where a couple agree that one of them keeps the house and the other keeps their pension, you will usually need to have checked with an actuary or a Pension on Divorce Expert (PODE) that this is fair. If not, a court may not seal (agree) your consent order. In protracted negotiations, or most court cases, you may need to update the values of your property and any investments, savings or pensions a few times during the process. Good financial advice and legal advice can be helpful in this scenario. Remember most court cases are taking a year to get to a final hearing where a decision is made. It is anyone’s guess what the value of your property will be in 12 months’ time.

    3 – You are keeping the property now and selling at a later date (eg a Mesher Order)

    On paper, a fall in property prices should not impact too much in this scenario. A Mesher Order is usually put in place where you agree to sell the property at a date in the future, possibly when the children are older and your needs change. You then share the proceeds of the sale at that later date, by a percentage split that is agreed now. The consideration with this is capital gains. If a property is valued lower now and the market recovers, you may be liable for more capital gains on the property. Again, good financial advice is helpful for this scenario.

    4 – One of you is keeping the property, transferring title to your name and the other is renting to maintain a home for the children.

    A drop in property prices should not impact your agreement too much in this scenario. If you are trying to re-mortgage the property into just one name and change the title over, it may be harder to secure a new mortgage, if the LTV is higher because of the reduction in property values. It is therefore worth getting good advice from a whole of the market mortgage adviser before discussing such options.

    What you can do to help your divorce?

    Irrespective of the state of the UK property market, the sooner you can reach an agreement and put that into effect, the better for both parties. It lets you move on with your lives. In a falling property market, speed can be even more important.

    Here are our tips on what you can do in this situation:
    • Get organised. Get realistic values for your property and other financial assets. The sooner you have your financial disclosure ready, the sooner you can start the process of reaching an agreement. You will need these anyway to get a legally binding agreement, so if both parties get them ready now, the sooner you can start negotiations and get legal advice on the actual figures.
    • Reach an agreement as soon as you are able, whilst making sure it is fair and you have taken good but realistic legal advice. Take a look at the 11 ways to reach an agreement on your divorce and see if you can agree on which option you will use first to resolve any disputes.
    • If selling your house, set the asking price at a reasonable level. Ask your estate agent to give a realistic selling value. Make the house look presentable to buyers. Get ready to proceed by having the conveyancer lined up. And remember to shop around for a good estate agent, don’t just use the one who gives you the highest valuation or the cheapest rate.
    • Once you have reached an agreement on what to do, have it made into a consent order as soon as you are able to. This will mean you are not constantly updating values on your financial agreement.

    If you have reached an agreement between yourselves, you can consider looking at a divorce facilitation agreement to sense check what you have agreed. If you cannot agree at this time, then the next step may be to try family mediation. This will take you through a process to help you reach an agreement that works in 90% of cases and is usually a requirement before you can go to court.

    A word on Spousal Maintenance

    Whilst falling house prices would not normally have too much of an effect on spousal maintenance, it is important to check that any agreement you reach is fair and that you can both afford to live moving forwards. If, due to a drop in house prices, your mortgage increases because your LTV is higher, this may impact on what you can reasonably afford.

    Conversely, if your mortgage is less than envisaged because the property you are buying has dropped in value, that too may impact any spousal maintenance agreed between you.

    Conclusion

    houses in a row with downward arrow indicating drop in valueDivorce negotiations can be complex and falling house prices add an additional layer of challenge to the process.

    However, by understanding the implications of declining house prices and seeking professional guidance, you can discuss these negotiations fairly. Remember to keep the discussion focused on future needs.

    In a falling housing market, speed can make the process far less stressful and allow you both to move on with your lives. And that is the part you should focus most of your attention on – moving on with your lives.

    Mediate UK offer a free 15-minute consultation. We can help talk you through your options and explain how family mediation fits into the process.

    Good Luck!

    Related Posts

    We can resolve your financial, property or parenting issues amicably, cost effectively and fairly

    Book Your Consultation Here
    ×

    How can Mediation Help?

    We can help resolve your Financial, Property or Parenting issues, amicably, cost effectively and fairly.
    Contact us to find out more about why mediation can help your case. 0330 999 0959 or email admin@mediateuk.co.uk.