Divorce has a way of turning ordinary household questions into surprisingly complicated ones. Who keeps the furniture? Who gets the dog? And what happens to the mortgage you signed together back when you were still happily debating whether the living room should be grey or slightly different grey?
For Ottawa homeowners, the family home is often one of the biggest financial issues to sort out during a separation.
Divorce doesn’t make the mortgage disappear
If both spouses are borrowers on the mortgage, separating does not automatically remove either person from the loan. Until the lender approves a change or the mortgage is paid out, the existing mortgage contract remains in place.
That means a separation agreement saying one spouse will make the payments does not, by itself, release the other borrower from their obligations to the lender.
Ontario’s property rules also need to be considered. For married couples, the matrimonial home receives special treatment under Ontario’s Family Law Act, and its value can form an important part of the equalization process when a marriage ends.
Common-law couples are different. Ontario does not automatically divide property between common-law partners using the same rules that apply to married spouses, so getting proper legal advice is particularly important.
Your family lawyer can determine who is legally entitled to what. Your mortgage broker can determine whether the plan you’ve agreed on can actually be financed.
Option 1: Sell the home
Sometimes the simplest solution is to sell the Ottawa property, pay out the mortgage and deal with the remaining equity as part of the separation.
Before listing, it’s worth checking the mortgage itself. If you’re partway through a closed term, selling may require breaking the mortgage and paying a prepayment penalty.
There are also realtor fees, legal costs and other expenses to consider before assuming that the number on your latest home-value estimate is the amount you’ll actually have available to divide.
Option 2: One spouse keeps the home
This is common when children are involved or one spouse has a strong reason to stay in the property.
The person keeping the home will generally need to show that they can qualify for the required mortgage on their own. The lender will look at income, debts, credit and the size of the new loan.
There may also be an equity buyout. If your former spouse is entitled to a portion of the home’s equity, the financing may need to cover both the existing mortgage and the amount required to buy out their interest.
This is why I like to run the numbers before the final agreement is signed. Writing “Alex keeps the house” is easy. Convincing a lender that Alex can afford the house is a separate exercise.
Option 3: Keep the mortgage together temporarily
Some separating couples decide not to sell or refinance immediately. One person may continue living in the home while both remain borrowers on the mortgage.
That can sometimes provide breathing room, but it also keeps the two borrowers financially connected. The mortgage can continue to affect both people’s credit and their ability to qualify for another property.
For married spouses in Ontario, both spouses generally have an equal right to possession of a matrimonial home regardless of whose name is on title, subject to agreements or court orders.
Talk to your mortgage broker before making the decision
If you’re separating in Ottawa and one of you hopes to keep the home, talk to your lawyer and mortgage broker early in the process.
I can review the existing mortgage, estimated equity, income and debts and determine what financing options may be available before you commit to a plan that depends on financing.
Divorce already comes with enough unpleasant surprises. Your mortgage approval doesn’t need to be one of them.
