Q: What’s the best way to buy my soon-to-be-ex’s half of the house?
A: Many Canadians consider buying their spouse out of the matrimonial home (the home they occupy at the date of separation) after divorce due to high home prices.
The first thing you need to do if you’re considering a spousal home buyout is to determine the value of the home, says Mary Sialtsis, a Toronto mortgage broker. You can do this by getting a valuation from an appraisal company or a realtor assessment, or you could do both and go with an average. Once you and your ex can agree on the value (this is key), the next step is to see if you can realistically afford to buy your spouse out.
In a spousal buyout, one spouse takes over the existing debt and pays the other for their equity in the home (the current market value of the home minus what you owe on your mortgage and any other loans secured against it) and takes sole ownership.
Let’s say the matrimonial home has a market valuation of $900,000, meaning that’s likely what you could get from the sale of your home. The outstanding mortgage balance is $600,000, and there’s $50,000 owing on a home equity line of credit, for a total amount owing of $650,000. That leaves $250,000 in equity. When split evenly between spouses, that’s $125,000. Your new mortgage would include both the outstanding mortgage and line of credit amounts and the equity for their half ($125,000), which means you would need to qualify for a new mortgage of $775,000.
“It can be hard to qualify for a higher mortgage on your own, especially if you will be paying out for spousal or child support,” Sialtsis says, adding that you would need to be earning around $195,000 per year before taxes to qualify for a mortgage of $775,000.
Mortgage default insurers Sagen, Canada Guaranty, and the Canada Mortgage and Housing Corporation all offer spousal buyout programs, which allow one spouse to buy out the other’s equity and take sole ownership of the home. You obtain a new mortgage from a bank and the insurer provides the required default insurance to the bank, so the new loan amount would cover both the old mortgage and the cash payout to your ex-spouse.
The bank lends you the cash but they don’t just hand it to you — you need to have the buyout amount stipulated in your separation agreement. The lender is provided a copy of the separation agreement then after all conditions have been met, the lender would release the funds to your real estate lawyer. Your lawyer would then arrange for your ex’s name to come off title and mortgage and pay them out, then register the new mortgage on title.
For a $900,000 house with a new $775,000 mortgage you would need mortgage default insurance, which is required any time you buy a home with less than 20 per cent down. Since the “down payment” of $125,000 (your part of the equity) is less than 20 per cent of the purchase price, you would need to get mortgage default insurance to complete this transaction. The borrower is responsible for paying the insurance premium, and the premium is typically added to the total mortgage amount.
If the value of the matrimonial home is $500,000 or less, the insurer (such as Sagen or Canada Guaranty) allows the remaining spouse to refinance the home for up to 95 per cent of the home’s appraised value, much higher than the typical 80 per cent available through a traditional refinance, Sialtsis says. This increased leverage provides the necessary funds to pay off the existing joint mortgage and give the departing spouse their share of the home’s equity in cash. To qualify, both spouses must be on the title and you need a signed separation agreement detailing the buyout.
When considering whether to approve you for a spousal buyout mortgage, lenders will look at your income, credit score and any other debts you have, including car loan or lease payments.
“Although buying out your spouse is a good idea, it’s not always possible,” Sialtsis says. She suggests working with a mortgage broker to see if you would qualify for a spousal buyout mortgage.
Money Coach is a weekly feature that helps Canadians find helpful solutions to personal finance challenges. If you have a question, email Lora at [email protected].
