Monday, May 29, 2023 / by Matthew Daniel Tamburello
Matthew Daniel Tamburello
Team Leader & Broker
It is common for couples when they are separating or getting divorced who own a home together for them to stop living together. It is common for the matrimonial home, the residence that a couple lives in before their separation to be the biggest asset that they own.
Given that many people will need a mortgage or financing from a bank or other financial institution to be able to afford to buy a home, chances are that if you are separating from your spouse or getting a divorce and wish to buy a new home, you will need a new mortgage.
In this article, we will talk about what your options are when dealing with your mortgage when you get divorced, your options for dealing with the matrimonial home when you are getting divorced and how to get out of a joint mortgage.
For a more detailed examination of the division of property after divorce and the end of a common-law relationship and property ownership rights for married couples and common-law couples, you can check out “Things You Should Know About the Division of Property After Divorce in Ontario”.
It is important to note that the advice given in this article is specifically intended for married couples who are separating, getting divorced, or are already divorced. The advice provided in this article is not intended for common-law couples when a common-law relationship ends.
If you have any specific legal questions about your separation or divorce you should consult a divorce lawyer. If you have any specific questions related to your mortgage you should speak with your lender, mortgage agent or financial specialist.
Why Separation is an important part of the process of getting divorced and how Separation can impact your ability to get a new mortgage after divorce
When married couples are going through the process to become legally Separated, they will be working on creating a written Separation Agreement that outlines what they have agreed to do regarding the following: who has custody over any children they may have together, custody arrangements for any children they may have together, child support, spousal support, and the division of their assets and debts, which often will include the family home.
A Separation Agreement is important since it details how both spouses’ financial obligations will be handled, as well as how property, and assets will be divided. While a divorce, if both spouses were legally married to each other, will allow both spouses to marry other people since the marriage is officially over in the eyes of the law. You should have a finalized Separation Agreement in place before getting divorced.
This should go without saying but marriages and common-law relationships are not the only relationships that have breakdowns and end. A common-law couple or two siblings might have bought a home together or an adult child whose parents were co-signers on their mortgage becomes estranged from their parents.
The following options described when dealing with getting out of a joint mortgage will also apply to the dissolution of these relationships. However, before you try to get out of a joint mortgage no matter the circumstances, you will need to come to an agreement with the other party about how you will be dealing with your shared financial situation and shared financial obligations first.
Things to keep in mind when trying to get out of a joint mortgage and qualify for a new mortgage after divorce
It is important that we consider a lender’s perspective when discussing mortgages. A mortgage is a financial obligation, a promise you have made to pay back your lender for the amount of money they lent you plus interest that allowed you to purchase your home.
So before anyone who is registered on the mortgage can leave the mortgage to go buy a new home, they will require all parties registered on the mortgage to address their existing mortgage.
You must understand that as long as your name stays on the mortgage, even if you are no longer living in the home and have nothing to do with the home, you will be financially liable for paying off the mortgage. Being financially liable with an existing mortgage will impact your ability to borrow money or get a new mortgage in the future.
Even if your partner decides to keep the home and promises to pay the mortgage on time, as long as your name is registered on the mortgage you will be responsible for mortgage payments if your spouse or the other parties on the mortgage defaults on the mortgage.
There are many situations where not taking your name off the mortgage could end badly for you. Once your spouse takes over your portion of the home, make sure to have them take you off the mortgage.
An important consideration related to qualifying for a mortgage in the future is how your spousal support or child support obligations could potentially impact your ability to qualify for a mortgage. Your obligations to pay spousal support and/or child support will be outlined in your Separation Agreement. If you do not have a finalized Separation Agreement, then you will need to get a Separation Agreement finalized with your spouse before you approach lenders for a new mortgage.
It is important to keep in mind that any obligations that you might have will be seen as monthly liabilities for lenders, this will limit how much you will be able to realistically borrow when applying for your next mortgage. Even if these child support and/or spousal support payments will be zero, lenders will need to see this evidence of a non-payment in writing before they will even consider deciding whether or not they can approve you for a new mortgage.
Furthermore, no lender is going to approve you for a new mortgage until you both can clearly understand what your financial obligations are going to look like. Therefore, finalizing your Separation Agreement and Divorce should be a priority if you want to consider trying to borrow money again.
Additionally, your future ex-spouse could potentially make a claim against any of your assets while your divorce is being worked out before it is finalized. For this reason, lenders are not going to take a risk and lend to you with the possibility that your future ex-spouse could make a claim against your assets while you are working out your divorce.
On the other hand, lenders might consider any support payments you receive (spousal support or child support) as income. If you can combine support payments from your ex-spouse with other income such as your salary from your job, this might be able to help increase your access to funds for a mortgage. However, it is important to note that support income when you are trying to qualify for a mortgage is usually not supposed to generally exceed one-third of your total income mix.
If you will be support payments when trying to qualify for a mortgage be prepared for the high probability that potential lenders will be asking for you to provide bank statements demonstrating that support payments are reliable and are match the amount outlined in the Separation Agreement.
You will improve your odds of getting your new mortgage application approved if you can show bank-to-bank transfers (no cash) on regular payment dates (in this case auto-pay is best) without any evidence of missed or delayed payments or hiccups. Even if you are not sure now how much you will be receiving in support payments from your future ex-spouse you should be working on starting the flow of support payments as early and reliably as possible.
You will need to have at least three months of bank statements ready when applying for a new mortgage to show the reliable, steady flow of support payments being paid from your ex-spouse’s bank account to your bank account.
Finally, if you are considering buying out your [future] ex-spouse’s share of the matrimonial home, you will first need to determine the property’s current fair market value. You can determine a property’s fair market value by hiring an appraiser to do an appraisal of the matrimonial home [Differences Between a Home Appraisal and a Current Market Assessment in Ontario].
If you and your spouse reach an agreement on the fair market value of the matrimonial home and agree on the price that it should be sold for you, you will need to calculate the net equity in the home. Equity is the difference between the balance left on the mortgage and the current market value of a home as estimated by a licensed professional appraiser or by the sale of a home.
You can calculate the net equity in the home using the following equation: the market value of the home minus any debts secured against the property as well as the estimated costs of disposition (the selling costs will be included since these costs have to be incurred in order to liquidate the property). If you and your spouse/ex-spouse cannot agree upon a price, it is common for the home to be listed for sale on the market and either spouse can bid on the matrimonial home on the open market with all of the other potential buyers.
Your options for getting out of a joint mortgage and what they mean for you when you are trying to get a new mortgage after divorce
1) You and your spouse sell your home.
You and your spouse both agreed to end your joint mortgage and sell the house, pay off your mortgage, as well as any other transaction costs associated with selling your home, the mortgage payout penalty, real estate attorney’s fees, and/or the commission charged by the real estate agent or broker representing you as the sellers.
In this scenario, any cash left over after the sale (the net equity’) will be split between the spouses as outlined in the Separation Agreement. You do not need a mortgage broker to do this. This might be one of the simpler options for getting out of the joint mortgage.
2) One spouse stays in the matrimonial home and buys out the other spouse, who is leaving the matrimonial home (no cash required)
In this scenario, the spouse or party who is leaving the home would request a ‘release of covenant’ from the mortgage lender, which allows them to remove their name from the mortgage. The party that is staying in the home and keeping the home will be “assuming the mortgage” and will be required to re-qualify for the mortgage on their own, based on their assets and the other party will be released from the mortgage.
There is no cash involved in this process, so all of the parties involved must have sufficient funds on hand to settle their affairs. It is possible that you might be charged a lender processing fee, this lender processing fee could range from a few hundred dollars to north of a thousand dollars. In this situation, usually, the lender does not require an appraisal.
3) One spouse stays in the matrimonial home and buys out the other spouse, the spouse who is leaving the matrimonial home (cash required)
If there is equity in the home and some of the equity is required to settle with the other party, the party who is looking to stay in the home and keep the home, might be able to refinance the mortgage in their own name to as much as 95% of the home’s appraised value so they can buy out the other party.
This will release the other party from the mortgage and ideally, will release sufficient funds for the other party to settle their affairs. It is important to note that the party who will be staying in the home, may not get cash out of the home for their personal use or to settle personal debts.
The party who wishes to stay in the home and keep the home needs to be able to qualify for a mortgage on their own. Mortgage refinancing after divorce is one of the most common options when one spouse wants to keep the home and assume the mortgage by themselves.
In order to qualify for mortgage refinancing, there needs to be enough equity in the home that will allow the spouse who intends to stay in and keep the home to pay the other party their portion of the equity in the home and the other party must be willing to sell their portion of the equity in the home to you.
You will also need to have enough credit and income to be able to qualify for a mortgage on your own. If you are able to meet these conditions, then you should be able to buy out your partner’s share of your home’s equity and assume the mortgage yourself.
Refinancing your mortgage after divorce is similar to a mortgage assumption because this option allows you to take back control over your mortgage from your partner. In this situation, you will not be depending on your spouse to make payments. However, this has the potential to be challenging for a single partner who is accustomed to living in a two-income household.
In this scenario, where you are refinancing your mortgage after divorce, you probably will need to have your home appraised. For this situation, the value of the matrimonial home can be based on a formal appraisal completed by a licensed or certified, professional appraiser [Differences Between a Home Appraisal and a Current Market Assessment in Ontario].
Each lender usually has a list of appraisers that they prefer to work with. You can arrange to have a professional appraiser come to appraise your home and use their appraisal when determining how much to sell your home to your spouse so you can avoid paying to have your home appraised twice.
4) There is no equity in the home, which means you cannot sell or refinance the home.
When there is no equity in the home this is called negative equity. If you cannot write a cheque to your lender for the shortfall in your home, you will have to hold onto your home until there is enough equity in your property to sell it.
If both parties agree to this, you might even consider leasing the home at fair market rent to a tenant. You can work with an independent property manager or property management company and your tenant’s rent payments could cover the mortgage, property taxes and insurance for the home.
You can draft and sign a joint venture agreement with your partner that will outline the details of this between both parties. In this scenario, both parties theoretically would have rental income which would help offset the expenses associated with holding onto this property and the negative effect of having negative equity in your home, with future mortgage borrowing would be greatly reduced.
A more in-depth look at mortgage refinancing after divorce as a way to assume your existing mortgage
In Canada, there is a mortgage program that allows one party to buy out the other party for as little as a 5% equity requirement in the property and the down payment can be as little as 5% of the property’s market value. This means if for example, you and your partner owned a home together and you jointly had 15% equity in the home, 10% of the equity in the home can be extracted to pay out one spouse or settle joint debts or obligations of the relationship. This mortgage program applies to a mortgage that you hold jointly with your spouse or any immediate family member (brother, sister, parent, etc.)
In order to make this happen for two spouses, this requires an offer to purchase the home, a signed finalized Separation Agreement and an Appraisal (your lender or mortgage professional will order this). The home must remain owner-occupied by one of you since it cannot become a rental.
And the person who is trying to refinance the mortgage and keep the home, must remain on the title and mortgage, must be able to still be qualified to carry the mortgage by themselves, so they should have sufficient income and a high enough credit rating that will allow them to do this.
An example to help illustrate how refinancing your existing mortgage after divorce to buy out your spouse’s portion of the home might work
Sam and Sue own a home whose current market value is $500,00 and the balance of their mortgage is $350,000, so there is $150,000 of equity in the home which they have agreed to split 50/50 per their separation agreement, or $75,000 each. Sam wants to stay in the home and Sue wants to leave the matrimonial home.
Sue and Sam have $20,000 in joint debts that will need to be paid before their joint accounts can be closed per their Separation Agreement. Sue and Sam agree to “sell” the home to Sam for $500,000 and a lawyer would draw up the purchase agreement documents.
The new mortgage available to Sam under this program would be for $475,000 (95% of the purchase price) because Sam would be providing $25,000 down payment (5% of the value of the home in a down payment) from their $75,000 share of the $150,000 in joint equity in the home.
After Sam’s down payment, Sam would be left with $50,000 and Sue would be left with $75,000. Sam and Sue’s joint debts are $20,000 so they contribute $10,000 and their joint accounts are paid off and closed.
At the end of this, Sam has the home, the title to the home, and the mortgage in their own name and no joint debts with their ex-spouse. Sue is left with no more joint debts, no more mortgage and Sue no has $65,000 in cash which they can use as a down payment to purchase their next home.
Things you should be doing before trying to apply for and qualify for a new mortgage without your spouse after divorce
It can be challenging to figure out how to manage your finances and budget when you are getting separated or going through a divorce. Here are some tips you can follow that can help you if your credit was damaged during your marriage, during your separation or divorce, or you are struggling to manage with only a single income.
Close any joint bank accounts you had with your spouse and open new accounts.
If your spouse opened any accounts in your name, you should close these accounts, you should close these accounts so you will be responsible for any missed payments on this account. Your credit score will take a hit immediately after you close an account, which is why we recommend opening new accounts immediately after closing old accounts.
Cancel any joint credit cards you had with your spouse and apply for one to new credit cards on your own.
The same logic for joint bank accounts applies to credit cards as well. When you are applying for a new credit card, you should only be applying for one to two new credit cards. Credit cards when used correctly and responsibly can be an excellent way to build credit and improve your credit score.
But applying for too many credit cards at the same time and too many inquiries on your credit report can scare lenders and lower your credit report. Therefore, if you are getting a new credit card or credit cards alone, do your research and make sure to only apply for cards that you will have a good chance of getting approved for.
Make sure to pay your bills on time and make sure that you are making credit card and debit payments a priority.
It can be challenging to manage financial commitments with only one income during a separation or after a divorce if you are used to relying on two incomes. You should make paying your credit cards and payments for any debts (mortgages, loans-student loans, car loans, etc.) on time. While it is also important to pay your rent, cell phone bill, and utility bills on time, late payments for these will not impact your credit score as severely if you make a late payment.
Consider speaking with a financial specialist to help you figure your finances
If you are having difficulty paying the bills during a separation or after your divorce, you might benefit from speaking with a mortgage agent or another financial specialist. Working with a financial professional or financial advisor can be helpful since they can provide you with specific advice on refinancing your mortgage and figuring out your financial situation based on your specific needs. You might also benefit from working with a financial advisor to work on mapping your financial future.
Separating, making the decision to get divorced, making decisions about where to live, the family home, and moving can be incredibly stressful and emotional. This is why it is recommended that if you can take your time during the separation process you take your time to really hammer out a Separation Agreement that will determine what happens to your family home, shared debts, assets, custody arrangements for your children, how your property and assets will be divided, spousal support, etc.
It is important to remember that no Canadian bank will give you a mortgage by yourself until you have a finalized Separation Agreement with your spouse. Therefore, you will want to be prepared for the possibility that it might take time for you and your spouse to come to an agreement about what to do with your property, assets, joint debts, etc.
In other words, you need to have all of your affairs in order before you try to get out of your mortgage and/or consider trying to qualify for a new mortgage either to assume the existing mortgage for your current home or a new mortgage to purchase a new home.
You will make finalizing your Separation Agreement with your spouse before you get divorced because this will help you to move on financially from your divorce. It is important to note that even if you and your spouse sell your home to third-party buyer or your spouse buys you out of the matrimonial home, the equity funds from these sales will be sitting in a real estate attorney’s trust account until a finalized Separation Agreement has been put into place that will dictate how the proceeds from the sale will be distributed.
If you are unsure about whether or not you will be able to qualify by yourself to assume the existing mortgage on your home or to get a new mortgage, you might benefit from speaking with a mortgage professional. You might also consider speaking with a financial advisor who works with people who are getting divorced if you need someone to help you with planning for your financial future without your spouse.
If your spouse decides to buy your portion of the equity in the matrimonial home, you need to have written confirmation from the lender who gave you a mortgage for the matrimonial home that you are no longer registered on the mortgage.
Being taken off the title or deed for the matrimonial home is not the same thing as being taken off the mortgage for the matrimonial home. If you do not have written confirmation from your lender that you are no longer registered on the mortgage, you might still be responsible for paying the outstanding balance for a mortgage for a house that you do not own anymore.
Getting divorced is frequently draining emotionally and financially, solid advice whether is financial or legal advice can be great as it can save you money and help you avoid frustration down the road. It is recommended that the earlier you can begin preparing for your separation and for a life without your spouse, the better it will be for you when it comes to trying to qualify for a new mortgage without your spouse.
You should be making any significant decisions related to your separation or divorce without consulting a divorce lawyer first. If you have any specific questions related to your specific case as it relates to your separation, divorce, or what happens to your mortgage you should not hesitate to consult a trusted professional.