Divorce, Matrimonial Home and Mortgages: Sage Advice And Good Options

image of couple fighting over houseDarren Robinson is a mortgage broker in Barrie. He helps many clients who are going through a divorce refinance their home and get on their feet. He has some interesting and suprising advice. Darren is with Dominion Lending in Barrie. He wrote the following excellent blog: 

How does separation or divorce impact my home & mortgage?

On the unfortunate occasion when a marriage is dissolved, there are a number of financial questions that need to be answered.  The most important is what to do with the matrimonial home?  The two easy answers are; 1) sell it, divide the equity & move on or 2) one party buys out the other party and stays in the home.

While option one might sound like the simplest option, if the couple have kids it is usually better for them to keep some type of consistency in their lives.  Staying in the home will allow them to remain at the same school & keep their neighbourhood friends which can be very comforting.  Also, option one might not be financially possible due to mortgage penalties or a weak real estate market.

In order for option two to work the spouse will have to ensure that they will be able to afford to stay in the house on one salary.  The current lender will need to re-qualify the applicant on their own before they will allow the ex-spouse to be removed from title and released from the mortgage (it is extremely important that both these steps are taken because it is possible for someone to be removed from title but still remain responsible for the payments if the mortgage is in arrears).  This transaction normally doesn’t involve any lender penalties but a real estate lawyer’s service will be needed to transfer the title.

If, as part of the separation agreement, the spouse remaining in the home is required to make a lump-sum payment to the other, they may need to refinance their mortgage to enable equity to be taken out of the property.  This may or may not involve lender penalties (check your lender’s policies).  In many cases the lender will allow you to leave your current mortgage intact but add refinance funds to the original balance in a transaction called a blend & extend, avoiding any penalties.  There are lending rules in place in Canada that will only allow a home owner to refinance their mortgage to 85% of the home’s value.  This can be very limiting to couples who have less than 15% equity in their home, so CMHC (Canadian Mortgage & Housing Corporation) will allow, on a case-by-case basis, the transaction to go through as a purchase to 95% of the home’s value.  This can then free up most of the capital the couple has accumulated in the house for a more simple division of assets.

If the spouse staying in the house does not qualify for a new mortgage on their own there is the possibility to add a co-signer/co-borrower to the mortgage.  This applicant is normally a parent or sibling who has good credit/income and is willing to take over payments on the home if the loan goes into default.  An alternative option is to leave the ex-spouse on title but I highly recommend against this because no matter how amicable your relationship is now you never know how your relationship will evolve in the future.

Keep in mind that most lenders require a finalized separation agreement be in place before they will consider a new approval.  They will need complete visibility/disclosure of any alimony or child support payments, as they will need to be calculated when qualifying the client for a new mortgage.

When facing separation or divorce it is always best to sit down with a mortgage broker for a free consultation.  They will be able to outline viable options and work through different scenarios throughout the separation process to ensure you’re making the best financial decision available to you.

If you live in the Barrie, Ontario area I’d be happy to set an appointment at my office (62 Commerce Park Drive, Unit N) to discuss your options and detail a plan to move forward.  You can call me at (705) 737-6161, (888) 737-6162 or by email drobinson@domininionlending.ca.  Alternatively you can find more information about mortgage financing at www.darrenrobinson.ca.

Division and Equalization of Property in Barrie Ontario

Property Division in OntarioThe division of property after separation raises many questions: How is it divided? Do we have to sell the house? Do I have to share my pension? What about my inheritance? 

The uncertainty leads to many sleepless nights. Everyone fears they will end up with nothing. The classic country song by Jerry Reid comes to mind for many: "She Got the Gold Mine, I Got the Shaft".(Women may insert "He" instead of "She" in the title and lyrics. The fear is the same for both genders.)

In Ontario, some of the uncertainty is eliminated by the Family Law Act which describes a formula so both you and your spouse end up with about the same net property. It looks like this:

+ Add up your assets on the date of separation

- Subtract your debts on the date of separation

Subtract any gifts from third parties, inheritances or proceeds from a personal injury claim received during the marriage which were kept separate and are still in existence on the date of separation

Subtract your assets less any debt you had on the date of marriage.

The resulting number is called your Net Family Property (NFP). Your spouse does the same calculation.

÷ 2  If your NFP number is higher than your spouse’s NFP number, you owe half the difference so as to make the NFP's equal.

Here is an example:

ASSETS ON DATE OF SEPARATION HUSBAND WIFE
Home (Jointly Owned) worth $240,000 $120,000 $120,000
Cars (Fair Market Value) $20,000 $12,000
Pensions $60,000 NIL
RRSP (deduct 25% for taxes) $10,000 $45,000
Snowmobiles (Fair Market Value) $5,000 NIL
Total A $215,000 $177,000
     
DEBTS ON DATE OF SEPARATION HUSBAND WIFE
Mortgage $80,000 $80,000
Visa $10,000 $7,000
Car Loan $8,000 NIL
Total B $98,000 $87,000
     
GIFTS, INHERITANCES, PERSONAL INJURY CLAIMS HUSBAND WIFE
Snowmobile - Gift From Parents $5000 NIL
Total C    
ASSETS LESS DEBT ON DATE OF MARRIAGE HUSBAND WIFE
Pension $15,000 NIL
RRSP NIL $5,000
Car $3,000 $4,000
Car Loan NIL ($2,000)
Total D $18,000 $7,000

To Summarize:

  HUSBAND WIFE
Total A (Assets) $215,000 $177,000
Minus Total B (Debt) ($98,000) ($87,000)
Minus Total C (Gifts, Etc) ($5,000) NIL
Minus Total D (D of M) ($18,000) ($7,000)
Net Family Property $94,000 $83,000

DIFFERENCE $94,000 - $83,000 = $11,000

EQUALIZATION OWED BY HUSBAND TO WIFE IS $5,500.00!

Once the Husband pays the Wife $5,500.00, each will have $88,500.

The Home: In this example, the home is jointly owned. If the Husband wants to purchase the Wife’s interest in the home, he would have to pay his Wife the equalization of $5,500 plus pay her for her one half interest in the home. This is calculated as $120,000 minus the mortgage of $80,000 equals $40,000. So, the Husband would have to pay the Wife $40,000 plus $5,500 for a total of $45,500. The Husband would then own the house solely and paid out his Wife. Alternatively, the house could be sold and sale proceeds divided or the Wife could buy out the Husband's interest. 

Ownership: You and your spouse keep the assets and debts in your own names. So, all we deal with in Ontario is the value of the various assets and debts. You don't have an ownership interest in your spouse's pension or other assets. Just a potential right to an equalization payment if they have more stuff (a larger NFP number) than you. 

Household Contents: If you want help dividing up the furniture and other items in the home, here is a blog about it. 

Adjustments: You may wish to to adjust the assets or debts so as to equalize the NFP numbers and avoid an equalization payment. So, in this example, the Husband might give his Wife some of his assets or take on some of her debt so there is no equalization payment owed. 

Excluded Property: An inheritance, a gift from a third party or a payment for a personal injury which is received during the marriage is not shared. If it was used to pay joint debts or invested into a jointly owned asset or is spent, it cannot be deducted. 

Equalization of property in Ontario

Debts: I often hear complaints from clients about having to take into consideration debts incurred by their spouse without their consent or knowledge. It is very frustrating. The law says that the reason debts were incurred does not matter except if it was for an illegal purpose. Your debts (meaning the ones in your name) are yours and your spouse’s debts remain your spouse’s debts, and jointly owed debts are shared. But everything is balanced out by the equalization process. If you have more debts than your spouse, your spouse may have to make an equalization payment to balance everything out.

Whole Picture: Some clients get confused because they want to equalize each asset or each debt one at a time. You have to look at the whole picture, using the formula above, and not look at individual assets or debts.

Unequal Equalizations: In rare cases, it is possible to ask for an “unequal equalization” if ordering an equalization payment according to the normal formula would be “unconscionable”. Our lawyers can help you determine if your case would be an exception to the general rule.

We have seen many people get the equalization calculation wrong, including other lawyers. Our lawyers only do family law and work with equalization calculations every day. We can help you get it right.

Case Study: If you are interested in reading how a typical case is resolved, read this article. 

Personal Insights: When I went through my own divorce (yes, divorce lawyers can get divorced... just like doctors can get sick), I learned some personal lessons. Here they are.

Perhaps Jerry Reid wasn't living in Ontario when he wrote the lyrics to his famous and hilarious song: 

Well, she got the gold mine!
I got the shaft.
They split it all down the middle,
And then they give her the better half.
Well, I guess it all sounds funny,
Hoo, hoo, hoo, ha-ha-ha-ha-ha!
But it hurts too much to laugh.
She got the gold mine - I got the sha-a-aft.

... or maybe he just retained the wrong law firm!