Spousal Buyout of a Mortgage
When a marriage, common-law arrangement, or another significant relationship ends, the division of assets, such as a mortgage, must be considered before the relationship is completely over. Unfortunately, how a mortgage is handled in this situation isn’t always black and white. Depending on how the partners decide to agree to split the assets will determine the complexity of the situation. A common choice of parties terminating a relationship is to complete a buyout. Let’s explore more on how a mortgage is dealt with when a relationship ends and how a buyout works.
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. Let’s explore how a mortgage is dealt with further below 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 agreeing to it. Of course, if one or both parties want to leave, they can, but they are still financially obligated to pay the mortgage and other property fees.
Will divorce affect your credit score? Find out here.
Common-Law Couples Going Through Separation
When a common-law couple separates, the individuals do not have equal rights to stay in the shared home. 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 figuring out who’s name is on the title of the property in question.
In terms of a shared home, whoever owns the home is allowed to stay in the home and the other common-law partner must move out. If the home is jointly owned by both common-law partners, then you 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 them living together. 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.
For more information about how living common-law affects your finances, click here.
Your Spousal Buyout Mortgage Options
If you’re going through the process of terminating a marriage, a spousal buyout 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. Let’s explore the steps you need to take when going through a spousal buyout below along with your buyout options.
Step One: Ensure the Relationship is Over
If there’s a chance both partners will reunite, there’s no point in going through the division of assets just yet. It’s a long, gruelling process – ensure that the decision is indeed final!
Step Two: 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 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 which merely means the marriage is legally terminated. A separation must come before a divorce and the legal agreement is required before a buyout occurs.
Finally, separation can occur whenever a relationship dissolves where financial obligations arise between the parties in question. For example, parents and children who are estranged and own property together may use a form of a separation agreement as well.
Step Three: 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. 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, so it’s ideal if you can handle the obligation now. 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 the 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.
Unfortunately, determining how to divide assets can become emotionally charged during a separation. However, that doesn’t mean that you shouldn’t discuss how the division of assets will be handled with your partner because it is necessary for the separation agreement and moving forward. The quicker you can agree on how the financial obligations will be handled and whether one party will stay, the less strenuous the situation will be and both of you can move on from the relationship. Try to think logically and calmly about the situation and remember that it is merely something that needs to be handled before your relationship can be terminated.
When you’re ending a marriage, the mortgage can be handled in one of four ways depending on the situation:
As mentioned, if both parties agree to sell the house, pay off the mortgage and other fees, then split the proceeds, no buyout is required. This option does not require a mortgage broker either making it the most simple solution.
One Partner Stays, One Partner 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 requalify 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.
One Partner Stays, One Partner 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 requalify 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 half and half, the partners can split it any which way they’d like.
No Equity, Selling or Refinancing Not an Option
If there is no equity in the home, in other words, 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 your 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 and this arrangement helps your odds of getting approved for another mortgage in the future, even if the current mortgage is still your responsibility.
For more information about how to borrow using home equity, check out this article.
Spousal Buyout FAQs
For many common-law and married couples, a mortgage is their largest asset and is often owned jointly to split the debt obligation. When you’re going through separation or divorce, the division of your mortgage will need to be considered, as we saw above. If you’re still puzzled by the process, below are some frequently asked questions about the spousal buyout program in Canada.
What is the highest amount that can be withdrawn from the home?
The amount agreed upon in the separation agreement is the maximum amount of equity that can be withdrawn from the property. The amount will be enough to buy out the other owner’s share of the property and be used to retire joint debts, if applicable. The amount that is withdrawn should not exceed 95% of the loan to value ratio.
What is the highest permitted loan to value ratio?
The maximum loan to value ratio is the lesser of 95% or remaining mortgage plus equity required to buy out other owners and pay off joint obligations, if applicable. The property in question must be the primary owner-occupied residence.
Is a full appraisal of the property needed?
Yes, when considering a joint mortgage, it is like a private sale which requires a full appraisal of the property.
Is a completed separation agreement necessary?
Yes, in order to qualify for the spousal buyout program in Canada you will need to provide the mortgage lender with a copy of a signed separation agreement. Within the agreement, your asset allocation should be clearly defined to make the process go smoothly.
Are the parties required to be married or common-law partners?
No, current owners can be friends, siblings or family members as well. Although, if the parties are not married or common law, a separation agreement would not apply, a standard clause would be included in the purchase contract instead.
Can the net proceeds of the buyout be used to pay off loans or for renovations?
No, net proceeds can only be used to buy out the other owner’s share of the equity and to pay off joint debts, if applicable. This is explicitly stated and agreed upon in the separation agreement.
Are all parties required to be on the title?
Yes, all parties related to the transaction in question must currently be registered owners on the title.
Handle Your Financial Obligations Now
The ending of a significant relationship, such as marriage or common-law arrangements, is never pleasant and you likely wish the whole situation could be over with as soon as possible. The reality is that the deeper you are into a relationship, the longer it will take to get out of, especially when there are financial considerations to make. 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.
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