In a previous post, I talked about the right questions to ask when it comes to dealing with the marital home. In that post, one of the options was for one party to keep the house by buying out the other party.
Let’s consider why this might be a preferred option. Firstly, you may not be able to find a house in the same neighbourhood which would keep your children in the same school and close to their friends. Secondly, maintaining a familiar environment can often help reduce some of the emotional impact a divorce has on children. Keeping the house might simply be a great financial investment.
So, beyond any practical or sentimental aspects, does it make financial sense? If you want to keep the house by buying out your former spouse, there are a few factors you need to consider.
Can you afford it?
Keeping a house when you cannot afford it is one of the most common financial mistakes people make when going through a divorce. It’s not just the mortgage payments that you need to consider. You’ll also need to budget for the property taxes, utilities, as well as maintenance and repairs. If you have an older home, you could find yourself on the hook for thousands of dollars in unexpected repairs.
If you can afford the mortgage and upkeep, consider consulting with a professional home inspector to get a better understanding of potential future costs.
Separation agreement
One of the most common oversights I see is when divorcing couples expect to purchase their next home but don’t have their separation agreement finalized. Lenders rely heavily on the separation agreement to dictate the mortgage amount they will approve. The separation agreement outlines the financials – everything from the division of the matrimonial home, to child support payments and alimony. It gives the banks and lenders a good idea of what your financial situation will look like post divorce.
It’s also worth noting that you will avoid paying the land transfer tax if you have your formal separation agreement in place before buying out your spouse’s share of the home.
How is your credit?
To buy out your ex-spouse, you will need to refinance the mortgage on the home (or take out a mortgage if the home has been paid off). To get a mortgage you need credit.
When I got divorced after 20 years of marriage, I learned this the hard way. I was a stay-at-home mom without any income of my own. I didn’t have my own credit card, had never taken out a loan, leased a car, nothing. I had no credit.
So when I needed a mortgage to buy a home, I ended up having to go with a “C” lender (or alternative lender) – a more expensive, last resort option and not one I would recommend if at all possible.
Refinancing
To refinance the mortgage, you will first need to determine what the current value of the home is. This means you will need to get a market valuation. In Ontario, your spouse is entitled to one half of the value of the matrimonial home. This will determine your buyout amount and, combined with your overall financial picture, will determine whether you qualify for the new mortgage.
Assuming you qualify, your spouse will then be removed from the title of the home and released from the existing mortgage contract. Also, be aware of any prepayment penalties on your current mortgage as these could result in thousands of dollars in unforeseen costs. After all, you will be breaking the current mortgage in order to obtain a brand new one.
As always, it is advisable that you discuss this option and others with your lawyer before making a decision on whether to keep the house or sell and divide the proceeds.
Would it make more sense to sell the house and move on? In my next post, I’ll cover the option of selling.
As always, reach out to me if you have any questions about your property options in a separation or divorce.
