Mortgage Options on Divorce or Relationship Breakdowns

How to get out of a joint mortgage.

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Sadly, "until death do we part" doesn't always work out.

"Life isn't about waiting for the storm to pass. It's about learning to dance in the rain."

On this page, we review how a divorce or relationship breakdown in Canada impacts your existing mortgage, your ability to get a mortgage in the future, and discuss some of the options available to you.

How to Get Out of a Joint Mortgage (Summary)

  1. Be certain that your relationship is definitely ending.
  2. Negotiate a legally binding separation agreement. You may need to involve lawyers depending on how cooperative you both are.
  3. Decide if one of you wants to keep the house or if you will sell it.
  4. If you sell the house, use the released equity to pay off joint debts and divide the rest as per your separation agreement.
  5. If one party keeps the house they must be able to qualify to support the mortgage on their own.
  6. If the party to stay can qualify for a mortgage, decide whether they will need to refinance and buy out the partner or simply obtain a release of covenant. 

 

Prior to Divorce, there is Separation

First of all, it is important to understand that "legal separation" is the process whereby partners reach written agreement on custody arrangement for any children, any financial support for children or spouse, and the division of the relationship's assets and debts, often including the home and related mortgage. A "separation agreement" deals with how the financial assets and obligations of both parties will be split, while divorce (if the parties have been legally married) simply means the marriage is legally ended, and both parties are free to remarry. The separation agreement comes first. 

While there is an unresolved separation between parties wanting new mortgage financing (or simply to renew), mortgage lenders simply won't get involved until you work it out. 

Other Relationship Breakdowns

It's worth mentioning that relationships other than marriage can also come to an end. This could include common-law couples, siblings who jointly own property, or an adult child who has a falling out with their parents, who may have co-signed a mortgage. These situations all involve the dissolution of a relationship, and the options below will be equally relevant. However, it's crucial to first come to a written agreement on how to divide your shared financial responsibilities.

Separation - the Easy Way vs. the Hard Way

Navigating a separation can be challenging, but it's crucial to kickstart the process by creating a separation agreement promptly, especially if you anticipate an upcoming mortgage need. Cooperation and understanding between both parties are key in making the legal separation of your affairs smoother. In cases where cooperation is lacking, the involvement of family law lawyers and even court proceedings may be necessary, leading to increased expenses and unpleasant experiences.

It's useful to educate yourselves on property and debt division during a relationship, utilizing available online resources to approach the process logically and remove emotions from the equation. Understanding what may or may not hold up in court is vital for a successful separation agreement.

Separation Checklist - What Needs Doing 

Property Division for Married and Unmarried Couples in Alberta

Property Division upon Separation and Divorce or Death of a Spouse in Ontario

Property & Debt - Family Law in BC

Create your own Separation Agreement

You can also Google "property division divorce" followed by your province to come up with more resources.

Your goal is to get you and your partner on the same page as to next steps so you can both part ways ASAP and both end up with clear financial options as they relate to obtaining mortgage financing for the current property or a future purchase.

If you are wondering if you could get a mortgage (assuming you will be able to reach agreement on a separation agreement), click here for a complimentary separation mortgage consultation. 

Why do mortgage lenders require a separation agreement?

A mortgage is a significant financial commitment. Before you can consider an incremental mortgage request, mortgage lenders will insist that the parties involved in an existing mortgage together address that payment obligation first, which we explore next.

It's crucial to understand that as long as your name remains on the mortgage, you are legally responsible for the debt, even if you no longer reside in or have any association with the property. In mortgage qualifying, you must earn enough income to support the repayment of all debts in your name, called your debt-to-income ratio. As such, an unresolved financial liability will have implications on your ability borrow further. Just because your partner agrees to keep the home and handle the mortgage payments, both parties are responsible for the payments if one defaults (due to illness, job loss, or other unforeseen circumstances). There are various scenarios that could arise and negatively impact your financial situation. It's best to avoid these situations, as mortgage lenders certainly won't entertain them.

Additionally, the aspect of spousal and/or child support obligations will also impact your debt-to-income ratio, hence your future mortgage options. These financial commitments must be clearly outlined in the separation agreement. If no agreement is in place, it's necessary to establish one before engaging with mortgage lenders.

Payment obligations are considered as monthly liabilities, which can restrict the amount you can borrow for your next mortgage. Even if the payments are set to zero, lenders require written confirmation of that before approving your borrowing.

TIP -  Occasionally, we have lenders that will allow us to deduct your support payments from your gross income rather than add it to your monthly liabilities, which is a huge benefit in improving your debt-to-income ratio and expanding your mortgage options.

Conversely, any support payments received can be viewed as income, which - if combined with other employment income - can help increase your access to mortgage funds. (NB: support income generally cannot exceed 1/3rd of your total income mix for mortgage qualifying purposes.)

TIP - Lenders will likely ask for your bank statements to prove the support payments you are supposed to receive are reliable and match the separation agreement amounts. You will have best mortgage approval results if you can demonstrate bank-to-bank transfers (no cash) on regular payment dates (auto-pay is best) with no missed payments or hiccups. Even if you don't know the exact amount that will be approved, start the flow early and reliably as you will need that going at least 3 months. 

 

Options for Getting Out of a Joint Mortgage

This section assumes that you have a Separation Agreement, or in the case of uncontested, no assets, no property, no kids, a lender may accept a Statutory Declaration instead, which is a one pager that can work in a pinch. Click the link to download a Statutory Declaration instead.

Some options for getting out of an existing mortgage and preparing yourself for the next are listed next.

  1. Sell - you both agree to end the mortgage contract and simply sell the house and pay off the lender, plus any transaction costs such as a mortgage payout penalty and/or Realtor fees. Any leftover cash (the 'net equity') can be split as agreed. This does not require a mortgage broker.  One party cannot sell the property without the other's consent, in case you are wondering.
  2. One stays, one goes, no cash required - the party who is to leave the home requests a "release of covenant" from the mortgage lender. The one to stay is said to "assume the mortgage" and must re-qualify to carry the mortgage solely on their own financial credentials, while the other is released. There is no cash available from this process, so the parties must have enough cash elsewhere to settle their affairs. There may be a lender processing fee of a few hundred and a legal expense of perhaps $1000. Generally, no appraisal is required by the lender. Release of Covenant does not require a mortgage broker; you talk to your current mortgage lender.
  3. One stays, one goes, cash is required - in the event that there is equity in the home and some of the equity is required for settlement with the other party, the party to stay may be able to refinance the mortgage in their own name to as much as 95% of the appraised value or the home in order to buy out their partner. This releases the other party from mortgage and hopefully releases enough cash for settling affairs. Note, the party to stay cannot get cash out for their own personal use/personal debts. (Tip - there is no requirement to split the equity 50-50). The party to stay must be able to qualify for a mortgage on their own. Feel free to request a mortgage pre-qualification assessment.
  4. No Equity, Can't Sell or Refinance - sad to say, but it happens. This is called negative equity and the only ways to get out of this deal (if you can't write a cheque to the bank for the shortfall) is to keep it until there is enough equity to sell. If the parties can agree, my favourite suggestion here would be to lease the property at fair market rent to a tenant. An independent property manager can be used, and the rent payments cover the mortgage, property taxes, and insurance. A joint venture agreement covers off the details between the two parties. As the parties now have rental income to offset the property expenses, the negative effect on future mortgage borrowing is greatly reduced. We can consult on this option and perhaps help set it up for a small fee or other consideration. Contact us.

Divorce Mortgage Refinance (option 3) in More Detail

Spousal Buyout Program - In Canada, we have a mortgage program that permits one party to buyout the other with as little as a 5% equity requirement. This means, for example, if there is 15% equity in the home, 10% can be extracted to pay out or settle the joint debts and obligations of the relationship.

  • The program applies to a mortgage held jointly with your spouse or any immediate family member (brother, sister, parent, etc.)
  • Requires an Offer to Purchase, a Separation Agreement, and an Appraisal (to be ordered by your mortgage professional)
  • Home must remain owner-occupied by one of you (cannot become a rental)
  • Person to remain on title and mortgage must still be able to qualify to carry the mortgage in their own name (which means enough income and a good credit rating).

"Equity is the difference between the mortgage balance and the current market value of the home as determined by a licensed appraiser."

Example:

  • Mike and Mary own a home with a current market value of $450,000 and a mortgage balance of $375,000, so there is $75K of equity, which they have agreed to split (per separation agreement) 50/50 or $37.5K each
  • Mary wants to stay in the home with the kids, who are still in nearby school, and Mike agrees.
  • Mike and Mary have $30K in joint debts to be paid before these joint accounts can be closed (per separation agreement)
  • A purchase agreement is drawn up by a lawyer, whereby Mike and Mary agree to "sell" the home to just Mary for $450K.  (That is how the deal is structured)
  • The new mortgage available under this program is for $427,500 (95% of the purchase price)
  • Mary will provide $22,500 (5% equity/down payment) from her $37.5K share of the $75K in joint equity.
  • After Mary's down payment, this will leave her with $15K and Mike with $37.5K.
  • The joint debts are $30K, so they both chip in $15K and the joint accounts are then paid and closed.
  • Upon completion of the transaction, Mary becomes the sole owner of the home with only her name on the title and new mortgage.  The joint debts with her ex- are now paid and closed.
  • Mike is left with no more joint debts, his name is no longer on the mortgage, and he has $22.5K cash, which he can then go use as a down payment to purchase his next home.
     

Important - In addition to the considerations on this page, please read on what it takes to mortgage-qualify under today's rules.

"To mortgage qualify, you need sufficient Income, Credit, and Equity (I.C.E.)"
 

Next Steps for Getting Out of a Joint Mortgage

  1. First of all, don't do anything that will screw up your credit rating. There is an old saying about not Cutting Off Your Nose to Spite Your Face, which is worth reviewing.
  2. Second, have a quick read on our Blog Article Keeping the House
  3. Finally, consult with a mortgage professional well in advance and let them know your situation and make sure you don't make any mistakes. It takes about 10 minutes for us to understand your situation and generate your options.

Please feel free to contact us for more information. Read here to see can you mortgage qualify.

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