When a marriage, common-law arrangement, or another significant relationship ends, the division of assets, like mortgages, must be considered before the relationship is officially over.
The handling of a mortgage in this situation can vary widely. The complexity often depends on the agreement between partners on how to divide their assets.
A common option upon the termination of a relationship is to complete a spousal buyout of a mortgage. Here’s how it works.
Key Points
- The division of the family home is handled differently for married couples versus common-law partners.
- A common way to deal with a mortgage when a couple separates is to complete a spousal buyout of a mortgage.
- A spousal buyout is a way to refinance the family home to pay out a spouse or common-law partner.
How Is A Mortgage Dealt With After The End Of A Relationship?
Ending a relationship can be complicated on many levels. One of the many things that you may need to consider is what to do with a jointly-owned property, which differs for married couples and common-law couples.
Married Couples Going Through Divorce
When a married couple goes through separation or divorce, both individuals in the relationship have equal rights to stay in the shared home. Unless one of the spouses has a court order, neither spouse is allowed to rent, sell, or mortgage the family home without the other spouse’s consent.
Both spouses must decide whether they want to sell or keep the home. If they choose to keep it, they must decide who will stay in it. If they cannot come to a decision, the courts will make one for them.
Common-Law Couples Going Through Separation
When a common-law couple separates, each individual does not have equal rights to stay in the shared home, unlike a married couple.
In general, any property that an individual brought into the relationship or purchased during the relationship remains that individual’s property. You can determine property ownership by looking at the title of the property in question.
For a shared home, whoever owns the home is allowed to stay, and the other common-law partner must move out. If the home is jointly owned by both common-law partners, they can either sell the home and divide the money or one partner would need to buy the other partner out.
Some common-law partners have a cohabitation agreement, which is a legal agreement that defines the parameters of their living arrangement. A cohabitation agreement would outline what the couple would do in the event of separation.
Without a cohabitation agreement, the couple may decide to use a lawyer or mediator to help with the division of the home. Ultimately, this would lead to some sort of buyout between the two common-law partners.
Your Spousal Buyout Mortgage Options In Canada
If you’re going through the process of terminating a marriage, a spousal buyout of a mortgage might be required. A mortgage is a financial obligation, and the lender will want to ensure that it’s properly handled before anyone leaves the house. Here are the general steps you need to take when going through a spousal buyout:
Step 1: Ensure The Relationship Is Over
If there’s a chance both partners will reconcile, there’s no point in going through the division of assets just yet. It’s a long, gruelling process – ensure the decision is final!
Step 2: Negotiate A Legally Binding Separation Agreement
A separation agreement outlines things such as how financial obligations will be handled, who will get custody of any children, child support, and spousal support if and when the relationship ends. Without a written, signed separation agreement, the partners are not legally separated.
Keep in mind that separation is different from a divorce. Divorce means the marriage is legally terminated. A separation must come before a divorce, and a legal agreement is required before a buyout occurs.
Step 3: Determine If One Partner Wants To Keep The House
If you both want to sell the house and split the proceeds, no buyout is required and the process is fairly simple. But if one party would like to purchase the house and live in it, the issue becomes more complex and several options arise.
In the eyes of the lender, the mortgage must be handled before the marriage terminates. Both partners are legally obligated to pay off the loan if their names are on the mortgage.
If one party wants to keep the home, they must buy out the other party. The person who retains the home will be solely named on the title and will be fully responsible for paying the mortgage.
Handling The Mortgage Sooner Reduces Complications For You In The Future
Remember that not dealing with your current mortgage now could impact your ability to get another mortgage or loan in the future because you’d still be liable for your old mortgage. Also, mortgage lenders don’t like working with this kind of risk, which is why buyouts should be completed when your marriage is terminated and often is a requirement.
Another reason mortgage lenders want you to handle the mortgage now is because of potential child and spousal support payments in the future. If you incur those costs on top of a mortgage, the likelihood of you defaulting is higher.
For all of these reasons, separation agreements are important because they will outline the division of your mortgage and other assets before lenders get involved, thereby simplifying the process.
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Ways A Mortgage May Be Dealt With In a Separation Or Divorce
When you’re ending a marriage, the mortgage can be handled in one of four ways, depending on the situation:
1. No Buyout
As mentioned, if both parties agree to sell the house, pay off the mortgage and other fees, and then split the proceeds, then no buyout is required. This option does not require a mortgage broker either, making it the simplest solution.
Alternatively, both partners may agree to keep the house and rent it out, dividing the cash flows. This may be an option if both parties want to turn the property into an investment.
2. One Partner Stays, One Goes: No Cash Needed
The partner who is leaving will need to request a “release of covenant” from the lender. The partner that stays will assume the mortgage and must re-qualify for the mortgage entirely on their own using their financial credentials.
Since the mortgage is being transferred from both parties to one party, each party will need to have cash elsewhere to handle their affairs. This option might have a lender processing fee and possibly legal fees. On the other hand, this process does not require an appraisal or mortgage broker.
3. One Partner Stays, One Goes: Cash Required
This option is also known as a buyout and requires one partner to purchase the other partner’s half of the property. Keep in mind that the second half includes any equity built in the house. This option will require an exchange in cash, which is usually financed by the individual who wants to buy the other spouse out.
The leaving partner will take the cash, be discharged from the mortgage and go their own way. The individual staying in the home must still re-qualify for the mortgage on their own and will receive the cash to complete the buyout.
Keep in mind that there is no requirement to split the home evenly. The partners can split it any which way they’d like.
4. No Equity, Selling Or Refinancing Not An Option
If there is no equity in the home or negative equity, then both parties owe more against their home than what it’s worth. In this case, both parties would be required to either come up with the money that is owed to get out of the deal or wait until there is enough equity in the home to sell.
If the latter is the only option and both parties agree, a great idea is to rent out the property while both partners wait to sell. Profits can be used to pay the mortgage, property taxes and utilities, and additional profits can be split.
A joint venture agreement can cover all the details between both parties. This arrangement helps your odds of getting approved for another mortgage in the future, even if the current mortgage is still your responsibility.
See How Much You Qualify For
Getting Financing To Buy Out Your Spouse Or Partner
Coming up with the money to buy out your spouse or partner can be difficult, Thankfully, there are programs available to help you finance your buyout.
Mortgages
If you don’t have the liquid cash to buy out your spouse in one lump sum, consider financing. There are plenty of lending options to consider, depending on your financial profile and credit score.
CMHC-Backed Financing
The Canada Mortgage and Housing Corporation (CMHC) allows one spouse to buy out the other person’s share of the home. By providing financing to the spouse who wants to keep the house, this program allows them to pay off the other person’s mortgage share and become the sole property owner. This program is available to both married and common-law couples who are splitting up.
To qualify for CMHC financing, you must be able to qualify for a loan on your own, which means you’ll need to show that you can afford the mortgage payments and other costs of homeownership. The property must also be considered your primary residence.
This program works by financing up to 95% of the property’s value. This money can then be used to pay out your partner or spouse. You must come up with the remaining 5% as a down payment. Once the transaction is finalized, you’ll start making payments toward your mortgage.
Private And Alternative Lending Options
Many private and alternative lenders work with borrowers who are unable to meet stringent loan requirements that are typical of A-lenders. You may be able to qualify for a loan using the help of a non-traditional lender.
However, keep in mind that the interest rates charged for private loans are typically higher than traditional financing.
Home Equity Loans
You may choose to use your home’s equity as a way to finance your spousal buyout. In this way, you can take out a home equity loan to access the funds needed to buy out your partner or spouse.
Home equity loans are secured by your home and can be easier to qualify for compared to other loan types. You’ll be provided with a lump sum payment, then make regular payments over a set term on both the principal and interest until your borrowed funds are fully repaid.
Reverse Mortgages
If you’re at least 55 years old and have enough equity in your home, you may qualify for a reverse mortgage. The funds can then be used to pay off your spouse.
With a reverse mortgage, you don’t have to make any monthly payments. This type of loan uses your home as collateral and lets you convert a certain amount of its value into cash. Generally speaking, you can access up to 55% of your home’s value, though the exact amount will depend on your age, your property’s value, and the lender.
The mortgage will only come due when you move out, sell the home, or pass away.
Final Thoughts
The ending of a significant relationship is never pleasant, and you likely wish the whole situation could be over with as soon as possible. But even though discussions about assets can be uncomfortable and emotionally charged, remember that the situation is temporary and the faster you handle it, the faster you can move on.
Spousal Buyout FAQs
What is the highest amount that can be withdrawn from the home?
What is the highest permitted loan-to-value ratio?
Is a full appraisal of the property needed?
Is a completed separation agreement necessary?
Are the parties required to be married or common-law partners?
Can the net proceeds of the buyout be used to pay off loans or pay for renovations?
Are all parties required to be on the title?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
