You do have options for your mortgage during your separation, each with its own set of pros and cons.
Deciding to part ways in a marriage is never easy, especially when you’ve spent time building shared assets and possessions. From your children, cars, friends and investments, there is an endless list of things you need to discuss dividing with your spouse before the official divorce happens. This separation process can take at least a year, where you’ll need to decide what to do with one of your largest financial liabilities: your mortgage.
While most provinces have different rules, in Ontario, without a prenuptial agreement in place, the responsibility for your mortgage is split equally between both parties. Despite separating, this also means that both people need to mutually agree on what to do next with the mortgage. Though it may be difficult, it’s important to understand that you do have options for your mortgage during your separation, each with its own set of pros and cons.
Option 1: Sell your home
The simplest, cleanest way to settle the ownership of your marital home would be to sell it. This solution will leave both parties with equal equity and enough money to pay off their share of the mortgage, settle other debts, and part ways without being overly messy. During this process, the costs associated with selling the home such as renovations, upgrades, and realtor commissions will be equally split. The benefit to this option is the potential to make a profit on the sale of the home, which could give you the chance to rent or buy a new place on your own.
Remember that in order to sell your home, both parties have to agree on this decision. During the separation process, the home can’t be sold without the knowledge and permission of your spouse. You’re also not legally permitted to rent out a portion of the home or take out another loan without letting them know.
Option 2: Purchase your spouse’s share of the home
There are numerous reasons why some people don’t want to sell their home during a divorce. You could have a sentimental attachment or your kids might be at a great school nearby. In this case, your best option might be to buy out the other half of the home from your spouse.
In the situation where the loan-to-value is conventional, and you’ve chosen to take on the mortgage you can do a refinance and pay out your ex-spouse, to release them from the mortgage.
However, if it’s a high-ratio mortgage, you’ll have to approach it by buying out your ex-spouse through a private sale.
Regardless of either scenario, you have to qualify on your own or add another co-borrower to the mortgage or title. To do this, you will need approval from your lender–but it’s important to note that qualifying for a mortgage on a single-income is a lot tougher, due to rising home values and the higher “stress test” rate.
However, if you are able to do this and your spouse agrees to let you buy them out, your next step is to remove them from the mortgage. Removing one person from the mortgage comes with the conditions of:)
- Being up to date on your mortgage payments.
- Having a positive credit score history and an adequate income to be the sole borrower.
It’s also important to consider that removing your spouse from the mortgage does come with additional costs including legal fees, discharge fees, and appraisal fees, and potential penalty and pre-payment charges.
You might even consider refinancing your mortgage to help you with some cash, especially if you’re set on having full ownership of the home.
Option 3: Continue splitting the mortgage payments
In some scenarios, your marriage could end very amicably where both parties sharing the mortgage is a choice you’re comfortable with. Perhaps this could be a mutual investment property for you both to make a profit in the future. Or maybe you both currently can’t buy the other out or qualify for a mortgage on their own. Your option here is to keep your mortgage and continue paying your part of the monthly payments.
The advantages in this scenario are avoiding any large costs that may be associated with buying out the other person or refinancing your mortgage. In best-case scenarios, you and your ex could decide to rent it out and use the money to help pay for the mortgage, property taxes, and other costs until the mortgage is fully paid off. If you’re on really good terms, another option is turning the home into a duplex where you can live in separate living spaces while still occupying the home you’ve built equity into.
Things to be wary of in this option would be having one person stop paying their half of the mortgage altogether. This could have serious negative impacts on your finances, especially if you’re not financially prepared to pay the full mortgage payments. Not to mention, the potential for it to hurt your credit score or affect your ability to get approved on a future mortgage.
Making the best decision for yourself
Choosing what to do next with your mortgage after a divorce can be a difficult step in accepting the marriage is over. It’s important to take some time to evaluate your finances and determine which step will set you up best for your future, both emotionally and, of course, financially. If you’re considering taking over the joint mortgage or have any questions about your options, one of Pine’s mortgage advisors would be happy to speak with you.