Divorce is a defining end to what’s supposed to be a beautiful journey in life. According to Statistics Canada, more than one-third of Canadian marriages end in divorce – 70,000 every year. In many cases, however, it marks the beginning of several bitter chapters of contention. Nowhere else is this harsh reality more evident than a mortgage.

Divorce usually involves splitting nearly everything in two – children, friends, and finances. A divorced couple also grapples with how to divide a mortgage appropriately. This exercise is complicated, to put it mildly.
It’s easy to understand why a mortgage is a big deal: a home is the most valuable asset for many couples. As a result, a mortgage is usually the biggest liability they’ll face. So, while they can tell each other it’s over, their debts can bind them together for a long time afterwards.

This article shares essential details of how divorce impacts mortgages in Canada. If you’re on the verge of divorce, you may want to consider, in earnest, what would happen to your family home and, by implication, your mortgage. It’s a process that can drain the strongest of us, making it necessary for you and your spouse to agree on what to do about it.

Remember, no spouse can legally sell, lease, or refinance the home without the permission of their [still] significant other. Until there’s legal documentation of your separation, you’re still technically married, meaning you need their permission to buy another property or sell the current one.

Divorce and Mortgage Across Canada’s Provinces

A divorce is an emotional abyss that traumatizes both parties. The paperwork can cause much frustration, and it’s a crucial time to know what’s going on with your finances.

You’ll need all the help you can get as laws governing how spouses divide home equity differ across Canada’s provinces. Sometimes, it’s several homes involved where the couple shares a cottage or vacation property. Those laws determine who’ll leave the table with the short end of the stick.

So, who gets what? In some cases, prenuptial agreements and other assets, such as inheritances, investments, and vehicles, are the deciding factors.

In most cases, homes and mortgages are divided down the middle, and a legally separated couple has the same basic divorce and mortgage options.

Release of Dower Rights

There is a legal statute existing to protect the spouse of any registered owner of real estate. Known as the Dower Act, it requires their consent to finance and sell a piece of property even without their names being on the title.

This spouse protection is available on any real estate that either party has occupied or will occupy while still married. In more straightforward language, if you or your spouse has lived in a property, you may have legal rights to that property even if you’re not legally on the title to it.

Lawyers can explain better if you find the Act hard to understand.

How a Divorce Can Impact Your Mortgage

Among other consequences, walking away from a marriage can affect the credit score of you and your spouse. Considering your credit score will help you be financially independent and allow you to own a home by yourself.

In some cases, there may be an agreement to sell the house. Here are a few implications of this decision:

#1 – How much is your property worth?

The common expectation is for you and your spouse to split the asset. What percentage each one gets is strictly the call of the courts, however.

#2 – Penalties

A divorce may happen without concern for the mortgage. Your mortgage lender’s policy could mean you’ll pay the penalty for exiting the contract early. However, there’s the option to redo the contract if your goal is to retain the title minus your spouse.

#3 – Real estate fees

If you’re selling the house, probably to buy another one, you should consider closing costs and lawyer fees.

#4 – Pre-approval

Getting a new mortgage means going through another pre-qualification round. It involves assessing your income and what you can afford. Most lenders will ask to see three months of alimony or child support payments deposited to your account before giving your application a look.

#5 – Possible extra expenses

For anyone looking to get a new mortgage, it’s advisable to take the opportunity to access the equity in your property. You could also consolidate high-interest credit card debt.
A gruelling divorce can shift your focus from your finances, but that should never be the case. It’s best to sort out legal documents and address the mortgage; it makes it easier to transition to new beginnings.

Emotions are one reason a divorce can get messy. But, your mortgage and other finances must remain intact. Being proactive about your mortgage can help to protect your credit score.
No one’s in complete control of their finances after a divorce, so working on your mortgage can be essential in keeping your sanity.

What if Your Home is in Negative Equity?

When your home falls in value after you’ve bought it, that’s negative equity. Selling a home that fits this description means you’ll not have enough to pay off your mortgage.

Negative equity is more common after a property price crash. Anyone may experience the bad luck of having it happen around the time of their divorce, making it necessary to do something else instead of selling.
One option is for one spouse to buy the other one out – that is, if they can come to terms. But, this is easier when property prices are low.

Agreeing to sell at a loss means working out a way to share the debt as part of the financial payment.

How does a spousal buyout work ?

A spousal buyout mortgage lets you buy out your partner’s equity in your current home and can pay out joint debt. Of course, you become the sole owner of the property.

The home equity is determined by the current value of the home which can be done by a professional appraiser and then you minus the mortgage balance and any penalties that could be associated with paying this mortgage off. Let’s say you have a $300,000 mortgage and the value of the home is $600,000, then you would have $300,000 in equity. If the agreement is to split this amount then the person keeping the home would take out a new mortgage of $450,000. This means $300,000 to pay off the existing loan and $150,000 would go to the spouse coming off title.

If there is little equity in the home and you need to borrow more than 80% of the value of the home, CMHC has a special program that allows you to borrow up to 95% of the house value with a separation agreement already completed. The separation agreement needs to be exact in terms of buyout numbers for the matrimonial home and debts. How much your spouse will receive on the buyout as well as which debt and how much of the debts will be paid out?

  • A purchase and sale agreement also needs to be drawn up between the two parties that indicates the current value of the home (which is the sale price) , the exact buyout amount, and any joint debt. Separating or divorce is the only time CMHC will allow you to finance more than 80% of the value of the home after you purchase.Using a spousal buyout mortgage allows you to get mortgage approval up to 95% percent of the value of the matrimonial property. But, here’s what you can pay out with this mortgage:
  • You can pay out your spouse’s home equity debt.
  • You can pay out non-mortgage debts such as car loans or credit cards accumulated during the marriage.
    Including these in a new mortgage means that you’ll clearly state them in the divorce agreement.
  • You have to pay out the current and existing mortgage on your homes.
  • You cannot channel the funds for personal use or at your discretion.

Conclusion

Living expenses are more likely to increase when you live alone. It’s more expensive to maintain a home by yourself. The Wilson Team Ottawa mortgage brokers can help you lighten the strain of divorce.

The Wilson team is especially adept at helping people recover from tumultuous life situations like divorce. They are relentless and successful at helping individuals in difficult financial situations sort out their mortgages.

Get in touch today to ensure that your divorce doesn’t leave you in dire financial straits. Do not get into the wrong product, lender, bank, terms and structure. Call the experts and we will walk you through all of your options and next steps.