I noticed some common frustrations among our mortgage clients so, here’s a few tips to make the process a little smoother.
Where to start?
I spoke with Jessica Freedman at Primeau Law and she was generous enough to give me a few tips! Jessica suggests: “The first step, before making any decisions regarding a separation/divorce, consult a Family Law Lawyer. In a 30-60 min consultation, the lawyer can summarize the process & your rights.”
Legal advice covers;
Parenting plan (child custody)
Child Support
Spousal Support (if applicable)
Division of matrimonial home
Division of assets & debt
“There’s no winning in Family Law”, says Jessica. “The division of assets is calculation, not a debate”
Next step…
During the separation process, there’s lots of decisions to make. A great place to start is taking a peek at Ontario Court Form 13.1 . This (admittedly, lengthy) form breaks down all the items that require decisions or mediation: income, expenses, property, vehicles, bank accounts, insurance, business details, debts… all of it. It can serve as a checklist of items that must be divided and help decide “who gets what”.
“You don’t have to go to court” says Jessica. "The court system is already overloaded and going to court is very expensive! Court should be the last resort, when all else has failed. For family law, there are other dispute resolution methods, including mediation & collaborative family law."
The “Matrimonial Home”
Each partner should get their fair share of their home's equity. Some couples sell the home & divide the proceeds equally. Sometimes, one partner buys out the other and keeps the home. Either way, the value of the house should be determined by a bias-free appraisal (you can hire a residential appraiser or even, ask an unbiased real estate agent)
“Never, never, never sign an agreement to purchase or sell the home until the house’s value has been confirmed by a professional” says Jessica. Great advice!!
Keeping The Home
The spouse staying in the home will have to pay out (or “buy out”) the other spouse. They usually refinance their mortgage to pay their spouse’s half of the equity.
Buying a New Home
The partner who is moving out may decide to buy a new home with the money they receive from the buyout.
The minimum down-payment is 5% for the first $500K and 10% for the portion between 500K-1M. 1M+ properties require 20% down-payment. Example: to purchase a house for $600K, the minimum down-payment is 5% of $500K ($25K) + 10% of $100K ($10K), so a total of $35,000.
Purchase Price | Min. DP % | Min. Down-Payment | Min. Household Income (+/-) ** |
|---|
$300,000 | 5% | $15,000 | $65K |
$400,000 | 5% | $20,000 | $80K |
$500,000 | 5% | $25,000 | $100K |
$600,000 | (5% x 500K) + (10% x 100K) | $35,000 | $120K |
$700,000 | (5% x 500K) + (10% x $200K) | $45,000 | $140K |
$800,000 | (5% x 500K) + (10% x $300K) | $55,000 | $160K |
$900,000 | (5% x 500K) + (10% x $400K) | $65,000 | 180K |
$1M | (5% x 500K) + (10% x $500K) | $75,000 | $200K |
$1M + | 20% | $200,000 |
|
** The bigger the down-payment, the less household income you need!
Tips...
1) Switch the bank accounts & debts ASAP
In the movies, we’ve seen a disgruntled divorcee empty the joint bank accounts or use up the spouse’s credit cards. - According to Jessica, this can actually happen and does! To prevent this, she has some suggestions.
For joint bank accounts, switch them from “OR accounts” to “AND accounts” - meaning, to access the money in the accounts, you need both parties’ permission, so nobody can empty the bank account.
For joint debt (lines of credit, credit cards…), freeze or cap the accounts, so nobody can rack up a bunch of debt without the other parties’ knowledge
2) Get a variable rate!
Why? Apparently almost 4 out of 5 (almost 80%) people get remarried after a divorce and the average time for someone to remarry after a divorce is just under 4 years.
Source; https://www.mundahllaw.com/how-long-after-a-divorce-can-you-remarry/
Here’s another stat, almost 70% of people get a 5yr fixed interest rate.
So….? Let’s look at Sally. During her separation, her ex bought her out (aka, kept the house and gave Sally her share of the equity) and Sally purchased a new townhouse. Like most people, she signed her new mortgage with a 5 year, fixed interest rate. Over the next 3 years, she meets a new partner and they decide to buy a house together. Sally sells her townhouse to purchase with her new partner.
And….the problem?
Because of Sally’s fixed rate, canceling (or “breaking”) her townhouse’s mortgage will cost a substantial penalty. This can be tens of thousands of dollars!! If Sally had a variable rate, her penalty to “break” her mortgage would only be 3 months interest; probably only a few thousand dollars at the most.
3) Keep your Separation Agreement handy… forever!
If a mortgage applicant has been separated, lenders want to see the separation agreement to confirm if the borrower pays or receives child support or alimony.
I’ve seen lenders request a separation agreement for couples that have been divorced over 20+ years! Understandably, clients aren’t happy about it. Often, after 20yrs, they have no idea where it is. The lawyer, then, must sign an affidavit…. It’s best to have a paper and digital copy of the separation agreement in a safe place and keep it forever!
Hope that was helpful!
If you have any questions, let me know! Email me at natalie@yourhomemortgage.ca
I'd like to thank Jessica Freedman at Primeau Law for providing great advice!!
Natalie