Mortgage Blog

Separation & Divorce - Your Mortgage Options

December 4, 2015 | Posted by: Kelleway Mortgage Architects

Yikes...separation and divorce are scary words, and can be even scarier - and more traumatic - if you delay knowing your mortgage options.   Before risking a missed mortgage payment due to unforeseen financial circumstances, speak with us about “default management.”  We’ll work with your mortgage lender to explore various arrangements to ease your load.

     If keeping the family home is important, we’ll go over some financial tools to make that possible, such as:

          - Switching from a variable to a fixed mortgage
          - Prepay and re-borrow
          - Deferring mortgage payments
          - Extending mortgage payment deferral
          - Extension of amortization period
          - Special payment arrangement
          - Capitalization
          - Interest-only payment

    If ownership of the family home needs restructuring, there are other options, such as:

          - Spousal buyout
          - Adding a guarantor or a different co-borrower
          - Sale by borrower(s)
          - Relocation assistance in exchange for a Quit Claim

    We realize that not everyone fits neatly into a category when filing for divorce.  However, from our experience with clients, we’ve noticed that many fall into life stage groupings that share similar circumstances and issues.   Their family needs and their financial situation will often determine their housing and mortgage options.

    Below we’ve highlighted these stages in reference to the ages of divorcing/separating couples and the ages of their dependents.   Our aim is to start the conversation with clients by encouraging them to self-identify where they are at with regard to these matters even when they are having difficulty talking to each other.  Sometimes hearing  unemotional advice about their mortgage options from a third (and unrelated) party, helps these separating couples move forward.  And, in retrospect, clients have often welcomed our advice as it makes their negotiations with each other -  and their respective legal counsel – shorter, less combative and less expensive!

     Couples Experiencing:

          Early-Life Separation or Divorce (RE-ESTABLISH)
          Mid-Life Separation or Divorce (RE-ALIGN)
          Later-Life Separation or Divorce (PRESERVE)


Couples Experiencing Early-Life Separation or Divorce

Who they are.  Often in their 20’s and 30’s these separating couples may have no children or young children at home and/or in daycare, pre-school or elementary school.

Their Financial Situation.  Household income may be low to moderate, they have not yet accumulated an abundance of high value assets (home, vehicles, durable goods and household items) and their debt is high (mortgage, car loans and credit card balances).  Added to these factors is that they may be carrying student loan debt .  If children are involved and the couple chooses to share joint custody, additional and significant expenses may include child support, spousal support, daycare, pre-school and after-school childcare costs.

Housing & Mortgage Options.  If the couple is fortunate, there may be extended family members who are able to gift funds or become guarantors or co-borrowers on separate mortgages with each of them.  Otherwise, this type of separating couple is less likely to have enough saved for down payments to purchase two separate homes in which each can live with their children.  One option is to proceed with a spousal buyout of the family home(up to 95% of the property value) where one can remain with children and the other rent.   Or, it may be necessary to sell the family home so both can live separately with children in rental housing.    However, depending upon their joint debt load, they may need to opt for  a consumer proposal  or personal bankruptcy.  Being young, they have the advantage of time to “reset” their lives to re-educate, re-train and/or re-establish their credit worthiness in order to generate more income to support two households.  Once re-established, the hope is that each could apply separately for their own mortgage in the future.  The key word here is to RE-ESTABLISH their income and credit-worthiness.


Couples Experiencing Mid-Life Separation or Divorce

Who they are.  Ages may range from mid-30’s to mid-50’s and these separating couples may have children in high school and/or post secondary school. 

Their Financial Situation.  They may be moving into the upper range of their household income and may have additional income coming from rental properties or other business.  However, they may also be contributing to registered retirement savings plans (RRSPs) for themselves and registered education plans (RESPs) for their children’s post secondary education.  Perhaps they are fortunate and a significant amount of home equity has accumulated over time.  Despite this building of assets, their monthly cash flow may be quite tight.  Due to expenses related to children’s activities, the lifestyle they’ve become accustomed to, and their contribution to investment portfolios, the result may be a limited budget and increasing unpaid balances on credit cards and lines of credit (LOCs).

Housing & Mortgage Options.  The course of action that might be best for this type of separating couple is to preserve their net worth and pay down debt.  If joint custody is involved in the split, there may be enough down payment and income for at least one parent to own a home if the other rents.  How high is their debt load?  Would it be better to downsize into two smaller households (e.g., townhouses and condos) to free up home equity, pay down high interest debt and thus increase monthly cash flow for each of them?  Perhaps there is enough income and equity to maintain two households and have some leftover to invest.  It is really helpful to make these types of decisions based on realistic calculations of income and expenses and that’s where we can help.  The key word here is to RE-ALIGN assets and debt to best provide for dependents and separate households.


Couples Experiencing Later-Life Separation or Divorce

Who they are.  Ages may vary but often these separating couples are 55 years old or more.   If they have children, they are likely adults who are either contributing to household income or are not living in the family home.

Their Financial Situation.  Although the separating couple may still be at their peak earning power in their work lives, the number of years to retirement has shortened considerably.  How long do they want to, or will be healthy enough to, continue working?  While they may have accumulated a significant portfolio of assets and their overall debt load is low compared to their middle years, their ability to income qualify for a mortgage has also diminished.  

Housing & Mortgage Options.  We advise these separating couples to not rent for the remainder of their lives even if the family home is sold.  The life expectancy of Canadians is often well into their 80s.  Therefore, if possible, we recommend each of them to own a home in order to preserve their assets and maintain a sufficient monthly cash flow.  Ideally, these individuals should aim for an amicable equalization of income and re-distribution of assets.  If the family home is sold, each could perhaps “right-size” into a smaller home and maintain a considerable amount of home equity.  Then later on, if their monthly cash flow is tight, there may be enough equity to support a reverse mortgage that adds to monthly income flowing from retirement savings funds.  The key word here is to conserve cash flow and  PRESERVE ownership and equity for as long as possible.


In Summary

     Separation and divorce can be a heartbreaking experience for the couple, their dependents and even extended family members.  The above categories of life stages are generalizations and will vary greatly according to household income, debt and family dynamics.  However, if you or someone you know is experiencing a pending separation or divorce, our clarifying available mortgage options can help move that process along - hopefully in the best interests of all parties.

What's the Next Step for You?

1)    Keep us in mind and on hand in case anyone you know runs into the same sort of situaltion.
2)    Share this post with your friends and family because you never know when the info could come in handy.
3)    Call or Email Us just to connect and get started talking about your plans. (see below)
4)    Sign Up for Glen's Perspective newsletter > Click here

Glen Kelleway, BSc, AMP, Senior Mortgage Planner & Owner

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