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.
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.
The General Issue
A mortgage is a financial obligation. From a mortgage lender’s point of view, before anyone heads out to buy another property, they want the parties to the existing mortgage to properly deal with that one first.
Keep in mind, as long as your name is 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 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.).
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 if the payments are going to be zero, lenders need to see that in writing (via a Statutory Declaration) before they will approve you to borrow again.
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. (Note: support income generally cannot exceed 1/3rd of your total income mix for mortgage qualifying purposes.)
Options for Getting Out of a Joint Mortgage
- Sell – you both agree to end the mortgage contract and simply sell the house and pay off the lender, plus any transaction costs such as a mortgage payout penalty and/or Realtor fees. Any leftover cash (the ‘net equity’) can be split as agreed.
- One stays, one goes, no cash required – the party who is to leave the home requests a “release of covenant” from the mortgage lender. The one to stay is said to “assume the mortgage” and must requalify to carry the mortgage solely on their own financial credentials, while the other is released. There is no cash available from this process, so the parties must have enough cash elsewhere to settle their affairs. There is a small legal expense, perhaps $1000, and no appraisal is required by the lender.
- One stays, one goes, cash is required – in the event that there is equity in the home and some of the equity is required for settlement with the other party, the party to stay may be able to refinance the mortgage in their own name (buyout the other) to as much as 95% of the appraised value or the home. This releases the other party from mortgage and hopefully releases enough cash for settling affairs. Note, the party to stay cannot get cash out for their own personal use/personal debts. (Tip – there is no requirement to split the equity 50-50).
- No equity, can’t sell or refinance – sad to say, but this happens. This is called negative equity and the only ways to get out of this deal (if you can’t write a cheque to the bank for the shortfall) is to keep it until there is enough equity to sell. If the parties can agree, my favourite suggestion here would be to lease the property at fair market rent to a tenant. An independent property manager can be used, and the rent payments cover the mortgage, property taxes, and insurance. A joint venture agreement covers off the details between the two parties. As the parties now have rental income to offset the property expenses, the negative effect on future mortgage borrowing is greatly reduced.
Please don’t hesitate to contact me to consult on your options today. Often, upon request and when emotions are running high, I will agree to talk with both parties separately to help each of you understand how to navigate this difficult time.