Separation or divorce: handling the mortgage and the house
When a separation or divorce occurs, sorting out what belongs to one spouse or the other can be tricky, especially when a house and a mortgage are involved.
While in many cases the obvious solution appears to be selling the house and splitting the proceeds, there may be other options available that are better suited to your situation. Do not hesitate to consult a notary to help you make an informed decision, even before checking with your financial institution.
Married or common-law: the impact on property ownership upon separation
First of all, it is important to know that even if the spouses separate or divorce, both people have a role to play in the sharing of resources and debts, including the mortgage debt. However, this responsibility differs according to the law, depending on the spouses' status, whether they are married or common-law.
Separating or divorcing when married
When both spouses are married, the two partners are considered equal before the law and each has the right to half of the family patrimony. In the case of a house, both spouses are legally entitled to half of the profits received from the sale of the property (if this solution is chosen), even if only one of them is named on the sale contract! The non-owning spouse also has the right to stay in the family home without being evicted by the other spouse.
Separating in a common-law relationship
When the two partners are in a common-law relationship, property is not necessarily divided in the same way as a married couple. If a cohabitation agreement detailing the consequences of a separation was signed by the spouses during their common life, it will be used as a reference when dividing property, including the house.
If there is no cohabitation agreement and only one of the spouses owns the property, that spouse can exercise his or her right (without abusing it) to determine whether the other spouse can stay or must leave.
If both spouses have signed the property deed, both partners must decide together who stays in the house and who leaves. Since they are co-owners and have the legal right to stay in the home, they cannot force the other to leave. The services of a lawyer or mediator can then be used to help both parties agree on how to divide the property and the rest of the family assets.
Real estate: what options do you have when you separate or divorce?
Sell the house for a new beginning
This is probably the most obvious choice and the one that allows for the most permanent breakup. Spouses bound by a marriage contract divide the profits from the 50/50 sale, while common law spouses who are co-owners must agree on the division of their assets.
If you are considering this option, note that selling your property before the end of your contract may result in a penalty fee for the termination of your mortgage. As explained on the Government of Canada website, as a general rule, "if you terminate your mortgage to sell your home, you have to pay a prepayment penalty. This is what banks call a prepayment charge. This fee can amount to thousands of dollars." Check with your financial institution to find out what penalty fees may apply.
Also, be careful not to sell your property under fire if you want to maintain good value for your money. In addition to having to pay penalty fees, selling on impulse could lower the profit you could make on the sale. It is always advisable to use a real estate broker to help you through the process of selling your home.
Buying out the spouse's share to become the sole owner
If one of the spouses involved in the divorce or separation process does not wish to sell the property, it is possible to transfer the mortgage to only one of them. As in the case of the sale of a property, first check with your financial institution to find out how much of a penalty will be applied for the breach of your contract if it has not expired.
You will then need to determine the value of your property. You can call on a certified appraiser for an accurate assessment of the value of your home. The amount you will have to pay to buy out your spouse's share will be calculated based on your property value using this calculation:
Home value - mortgage balance - penalty fee = net profit
Net profit ÷ 2 = amount to be paid to spouse to buy out his or her share
Before the transfer can be made, the spouse wishing to retain ownership will have to prove that he or she can pay for the house alone. This means that the spouse must have sufficient income, a good credit history and be current on the mortgage payments.
In the event that the transferee spouse does not qualify with the bank, he or she can ask a co-borrower (endorser) with a good credit history to guarantee the loan. Before you co-sign, make sure you understand your responsibilities and those of your co-borrower.
In rare cases, the bank may agree to assign the mortgage as is to one spouse, but in most cases a new mortgage will have to be taken out. Note, however, that you are not obligated to take back a mortgage from the same financial institution, since the penalty for breach of contract will have been paid.
Assuming the entire mortgage through an assumption agreement
Where one spouse agrees to take over the mortgage and assume full responsibility for it, the co-owners can sign an assumption agreement. This type of agreement is usually a last resort, to avoid selling at a loss, paying penalty fees and renegotiating a new mortgage.
Note, however, that the assumption agreement keeps both spouses' names on the mortgage. It can therefore hinder the future plans of both ex-spouses, by preventing the one who left from taking out another mortgage, for example.
Whatever your situation, do not hesitate to call upon a professional to help you in your process. They can greatly facilitate your life during a period as complex as a separation or divorce.
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