Mortgaging through divorce

Divorce sucks.

This week I met with five clients who are separating. This was unusual for me; it’s been a while since I’ve worked with clients who are going their separate ways.

Each situation was slightly different, but for three of the five couples, financial issues were what pushed them to the point of separation.

Stressing day after day about outstanding bills or not having funds available to manage the necessities of life is not a fun way to live. Even the strongest couples have a tough time surviving financial duress.

Whether you are trying to salvage your relationship or are past that point, it is important to know that you have options. Some of these options involve dramatic lifestyle changes, while others can be fairly simple changes.

If you are trying to straighten out your finances, here are a few ideas to consider:

  • Have a heart-to-heart with your spouse and go over all of your bills so you are both on the same page as to how serious things are. Brainstorm together to think about options.
  • Draw up a budget detailing your fixed monthly costs. Compare your bank statement to the budget to see if there are any changes you can make to free up monthly cashflow (can you cancel your home phone? Drop to a lower package for TV and internet?). It can be staggering to total up how much we spend on items like drive-thru coffee or takeout meals.
  • Approach your bank for a consolidation loan. Do you have family that might be open to helping?
  • Prepare a list of your assets and see if there is anything you might be able to sell. Things can be replaced at a later date – your sanity not so much. Could you potentially survive with one vehicle instead of two? Do you have toys in the yard that you don’t use all that often (ie: quad, snowmobile, boat)?
  • Do you have RRSPs, investments, or a life insurance policy with a cash value that can be redeemed? Withdrawing from your RRSP could potentially create a tax debt the following year, so think carefully before taking this step.
  • Consider refinancing your home to pay off consumer debt and reduce your overall monthly payments. This will only be an option if you have a significant amount of equity in your home. The maximum mortgage lenders can consider is 80 per cent of the value of your home. If your home is worth $500,000, the maximum mortgage available would be $400,000 (subject to income and credit qualification). In this example, if your current mortgage balance is $350,000 you could potentially access $50,000 to pay off other debt.
  • Think about taking on a second job or looking for a position that pays more.
  • Talk to your creditors to see if there is any way to reduce monthly payments due.
  • Sell your home and look for a more economical place to live. In our market, this isn’t as straightforward as it sounds, but being able to pay off your bills might be worth the upheaval.
  • Approach a credit counselling agency. Sometimes having a frank conversation with a third party might help you identify solutions. There are programs such as consumer proposals or bankruptcy where the credit agency will negotiate with your lenders to reduce the amount due and come up with a more manageable payment schedule. These are options of last resort as they will affect your credit rating for the next seven (or more) years, depending on how long it takes you to fulfill your obligations.

If you are past the point of salvaging the relationship and are at the point of dividing your assets (and bills), hopefully you are able to work collaboratively to sort things out.

If one spouse is looking to buy the other out of the marital home, the 80 per cent rule with respect to refinancing does not necessarily apply. Although the program is not published online, Canada Mortgage and Housing Corporation will insure mortgages up to 95 per cent of the home’s value when there is a marital breakdown involved.

Using the example of the same home valued at $500,000, the spouse taking over the home would be eligible (again, based on income and credit qualification) to mortgage up to $475,000 to pay out the spouse that is moving out.

There are a few intricacies to be aware of. A spousal buyout is essentially treated as a purchase of the home, so most lenders require a purchase agreement in addition to a separation agreement.

You will need a separation agreement which spells out the division of assets and identifies any support to be paid (or received, whichever end you are on). If there are no children involved and no spousal support payable, some lenders will accept a Statutory Declaration stating this in lieu of a separation agreement, but this is decided on a case by case basis.

In this situation, the new mortgage can be used to pull equity to pay out the ex-spouse’s interest in the home but not to pay off joint debts. It is important to keep this in mind when you prepare your separation agreement.

Reach out for help before things get too bad. It is heartbreaking to see couples torn apart, regardless of the reason.

Most importantly, find a financial professional that you are comfortable working with to help you through the process. Judgement is the last thing you need.

Sometimes that extra set of eyes reviewing your overall financial picture might help you identify a solution to get you back on the right track. If you find yourself in this position, I am willing to help you look for alternatives.

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About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order to match the needs of their clients with the right mortgage package.

They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit http://www.okanaganmortgages.com

Visit their blog at https://www.okanaganmortgages.com/blog


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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