Helping hand for broken homes

A new mortgage was launched this week, aimed specifically at people who have recently divorced or been through a relationship break-up.

The deal, called Fresh Start, is designed to overcome some of the difficulties people face when they effectively have to divide one home into two. Unusually, it allows borrowers to pay nothing at all for the first six months. There are other perks, too, such as access to a free counselling service.

Are deals like this just gimmicks, or do they meet a real need? Would people knocked sideways by divorce or separation be better off with a standard mortgage?

It's a sad fact that more than 150,000 couples divorce each year, with many more experiencing the breakdown of a long-term relationship. And it is also true that divorce is one of those life events that can wreak havoc on even those with exemplary finances and sometimes leave them struggling to obtain a mortgage.

Yet the only other home loan specifically aimed at this market - mortgage broker John Charcol's "divorcee mortgage" - was withdrawn about two years ago when the bank providing the funding got cold feet.

Part of the reason for this lack of deals may be that many people who get divorced quit owner-occupation, at least for a while; they rent or move in with family or friends.

Fresh Start has been launched by Yorkshire building society and is targeting those who are selling the family home and buying two houses, or one partner who is buying out the other's share in the property - although it is available to all borrowers, whatever their circumstances.

There are two versions of the loan: one fixed at 5.49% for five years (until December 31, 2010), and one that tracks the Bank of England base rate where what you pay is pegged at 1% over the base rate for six months, then at 1.25% over the base rate for the next four years.

Both deals have an initial six-month interest-free period. If you take out the deal on a repayment basis, you would pay off some of the capital during that time, but if you went for the interest-only version you would pay nothing for six months (there is a £395 completion fee). And both deals allow people to borrow up to 100% of the property's value, with no "higher lending charge" to pay. They also throw in £400 cashback.

However, one of the most useful features of Fresh Start is that it enables those receiving maintenance payments to have them taken into account when the society calculates how much you can borrow.

Some banks and building societies refuse to allow people to add maintenance payments to their income for loan calculation purposes, and those that do take them into account usually insist on proof that the payments have been ordered by the court.

That can penalise ex-couples who have decided among themselves what the payments will be. However, with this deal and all its other loans, the Yorkshire only requires a solicitor's letter confirming what the payments are.

So what do the experts think? Ray Boulger at John Charcol likes the Fresh Start deal and says it addresses a gap in the market. If you need to borrow 100% of the property's value, the 0% interest for six months means that if you take out the fixed rate, the effective rate is really just under 5% - and that makes this the best 100% five-year fixed rate on the market, he adds.

If you can stump up a deposit, however, there will be other deals that offer better value. Portman building society is currently offering a five-year deal fixed at 4.5%, and will lend up to 95% of the property's value.

Likewise, if you want a 100% tracker deal, Fresh Start is good value, says Mr Boulger. However, both deals have early redemption penalties for five years, and some people starting afresh won't want to be locked into something for that long.

Simon Tyler at rival broker Chase De Vere Mortgage Management says: "A lot of people will find aspects of this mortgage quite useful." He adds that the main downsides are the higher rates if you don't need to borrow 100%, and the fact you are tied in for five years.

"We often advise divorcing couples to take mortgages that are as flexible as possible because this is a time of great change in their lives and they are often unsure about their next steps. But the mortgage is portable so that does give some flexibility," he says.

On the tracker front, National Counties building society offers a five-year tracker pegged at 0.1% below base rate (giving a 4.65% current pay rate), though you do need a deposit of 20%. If you can scrape together a deposit of that size, the National Counties deal is significantly cheaper than the Yorkshire loan.

In addition, Saffron Walden building society is offering a tracker deal where you pay 0.20% over the Bank of England base rate for the term of the mortgage, provided you can manage a deposit of at least 5%. This deal has free legal and valuation work for remortgages, and no early repayment charges at any time, but there is a £499 fee to pay.

When lenders deal with people who have recently divorced, some will look at whether there are children involved, says Mr Boulger.

If the children are young, that will give comfort to the lender that the maintenance payments usually being paid to the ex-wife are going to continue for some time. If they are in their late teens, lenders tend to be much less comfortable, he adds.