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.
First of all, it is important to understand that Separation is the process whereby partners reach written agreement on custody arrangement for any children, child support, spousal support 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 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. Separation Agreement comes first.
It is also important to note that other relationships (besides marriage) can breakdown. For example, that of a common-law couple or siblings who bought a home together, or an adult child becomes estranged from Mom & Dad who had previously co-signed the mortgage. These are all examples of a dissolution of a relationship, for which the options below will apply equally. In all events, however, you do need to reach agreement on splitting up your joint financial affairs first.
"Life isn't about Waiting for the Storm to Pass. It's about Learning to Dance in the Rain."
Things aren't always easy during a separation, but it is incredibly important that you get started on a separation agreement right away none-the-less. The process of legally separating your affairs will go much easier if both parties understand the necessity of the steps that need to be taken and agree to cooperate as best they can. In less cooperative scenarios, the separation agreement will require the help of family law lawyer representing each party and potentially a trip to court. This can be unpleasant and significantly more expensive for both of you. In the absolute worst case, one of you drags you both into bankruptcy and foreclosure through failure to cooperate and emotionally charged irrational behavior (sadly this happens with some regularity).
As it relates to property and debts acquired together during a relationship, there are some excellent guides available on the internet. Please educate yourself and share with your partner. These sample checklists and guides can help you to begin to think logically through the process and remove some of the emotion. Learn what will fly and what won't if it ever gets to court.
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. Mortgage options can only be explored once you are both very near agreement on the Separation Agreement. This concept is explained next.
A mortgage is a financial obligation. From a mortgage lender's point of view, before anyone heads out to buy another property, they want (and require) the parties to the existing mortgage to properly deal with that one first.
Keep in mind, as long as your name remains on the mortgage, you are financially liable for the debt even if you no longer occupy or have anything to do with the property. Being financially liable will impact your ability to borrow (or not) in the future. So even if you or your partner is going to keep the home and agrees to pay the mortgage, as long as the other's name remains on the mortgage, they too are responsible for the payments if the other party defaults (illness, job loss, revenge, etc.). There are numerous ways this could play out and sink your ship! Don't go there. Certainly, mortgage lenders won't.
The less obvious issue as it relates to future mortgage qualifying is that of spousal and/or child support obligations. These financial obligations are to be spelled out in the Separation Agreement. If there is no agreement, then you will need one before talking to mortgage lenders. Here's why:
Any payment obligations are viewed as monthly liabilities, as such will limit how much you can safely borrow on your next mortgage. Even it the payments are going to be zero, lenders need to see that in writing before they will approve you to borrow again.
TIP - We have a lender that may allow us to deduct your payments from your gross income rather than add it to your monthly liabilities, which is a huge benefit in improving your Total Debt Service 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 bank statements to prove the payments 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.
So let's assume 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.
Some options for getting out of an existing mortgage and preparing yourself for the next are listed next.
"Equity is the difference between the mortgage balance and the current market value of the home, as estimated by a licensed appraiser or by actual sale ."
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.
"Equity is the difference between the mortgage balance and the current market value of the home as determined by a licensed appraiser."
Important - In addition to the considerations on this page, please make sure you can mortgage-qualify under the new rules!
"To mortgage qualify, you need sufficient Income, Credit, and Equity (I.C.E.)"
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.
Second, have a quick read on our Blog Article Keeping the House
Finally, talk to a mortgage professional well in advance and make sure you don't make any mistakes.
It takes about 10 minutes for me to understand your situation and generate your options.
Often, upon request and when emotions are running high, I will agree to talk with both parties separately (on the phone) and help each of you understand how to navigate the storm without sinking.
As licensed professional mortgage brokers, we know exactly what it takes to qualify you for a mortgage and we do more than just get you a great mortgage at a great rate, we will show you the way, too.