Did you know that in 2020 there were about 2.71 million divorced people in Canada? It’s a trend that has steadily been increasing for the past 20 years and the year of the pandemic was no different.
In fact, it’s likely that you or someone you know separated or ended a common-law relationship or marriage last year — and that’s okay. There’s no longer the stigma surrounding these splits and the stress we’ve all had to endure is certainly not immune to relationships. That said, there are still lots of financial factors to consider when going through this process.
Here’s a common scenario that I’ve had to help navigate a lot over the past year, so stop me if it sounds familiar! John and Jane have decided they are splitting up. So John reached out to me wanting to know what they’d need in place in order to buy a house for themselves. I told him that I was sorry to hear that was the case and that I’d be happy to help navigate the situation and see how I can help. So we got a file set up and explored her options together!
The first question I asked was, “Do you have a separation agreement drawn up?”. John told me that they’ve started that process but nothing has been finalized yet. I told him that’s okay and that we can still move forward but also explained how that piece is a necessary part of the puzzle we’re working with.
Lots of newly split people don’t always realize that without a signed and complete separation agreement, many financial processes become hindered and cannot get wrapped up. You don’t need pesky paperwork to be the thing that’s standing in the way of your important next step, so don’t underestimate the importance of this type of agreement.
A separation agreement allows two spouses to live “separate and apart” but it is not a legal ending to a marriage (i.e divorce). It will cover child custody and support, division of property, spousal support, and other important items.
Next, I proceed with my standard pre-qualifying questions:
- What do you do for work?
- What’s your income?
- Have you had any credit issues in the past?
- Do you have your own credit?
John is single now, so I explain and help him understand that he needs to have his own credit and how important this is. Personal credit shows lenders that you, as an individual, know how to manage your own financial situation, helps them evaluate and assess risk, and gives them a clearer ‘money picture’ to deal with. It’s at this point I come to the understanding that John’s income alone is going to make this application a little difficult — especially in our current market.
Personal credit is a sense of financial trustworthiness that is built up through paying bills in full and in a timely fashion.
My next question is, “Will you be receiving support?”. With the separation agreement still in the works, he’s not certain on the amount but the expectation is that there will be financial support payments. Once again, I can work with this! As we do our hypothetical application, we can use government information as a starting point to make a fairly accurate prediction on how much might be received.
Both child support and spousal support payments are considered forms of income that can be used in the qualifying process. In this case, we know that those support payments are needed to qualify for the mortgage but we also have to prove that they’re being received before we’ll get the final mortgage approved. We might not be able to use 100% of the support but it can certainly help during this stage when trying to qualify the deal.
Next up then, “What do you have available for a down payment?”. John tells me that his former partner is keeping the house but that he’ll be getting a lump sum from the equity of the home as a payout. Perfect, make sure that’s outlined in the separation agreement to prove where we’re getting the money from! This is a crucial step for the final stages of the qualifying process.
I ask about other savings, investments, RRSPs, GICs, stocks, etc. and John tells me he has some money in RRSPs. “Did you use them when you purchased the first time?” I ask. John tells me that he did but that they’ve been paid back in full. This is more great news as this is a specific situation where you can use RRSPs as a down payment for a second time because there was a breakdown or dissolving of a relationship.
Now that we’ve gone through all of this information and have it on file, we can proactively set up a formal application. We still have to wait for the separation agreement to be completed though and have the bank verify whether support is being paid or not. What Jane has to realize here is that this support is treated the same as debt, just like a credit card, car, or loan payment. The larger the support payment (and debt load), the tougher it is for them to qualify for the existing mortgage on the house — let alone what they’ll have to have loaned to pay out John’s portion.
In this specific instance, a mortgage refinance is probably the best option and can happen above the standard 80% of the home’s value. For reference, a typical refinance maxes out at 80% but, in the case of a marital breakdown, there’s a specific program that allows for up to 95% of the value. The key for John and Jane here is that everything has to be outlined in the separation agreement. The separation agreement that properly outlines all the pieces from the above discussion is the linchpin to success here and in general for having a more agreeable parting of ways.
Mortgage refinancing refers to renegotiating an existing mortgage for a new one. It can include increasing the principal or paying out the mortgage in full. When refinancing a mortgage you can borrow up to 80% of the appraised value of your home. The lender may agree to refinance the home with another mortgage, home equity line of credit, or a loan secured with the home.
Fast forward a little bit and it’s now the point in our journey where the agreement has been completed and witnessed, we can proceed with the formal mortgage applications for both John and Jane. Although it isn’t mandatory in Ontario, separation agreements can often be notarized and this step is an additional level of assurance (especially when the agreement is on the more complicated side). In this specific case, all the numbers worked out and — with our help and guidance — John got approved, is in their new home, and Jane was able to keep the previous one!
Contact the Kyle Miller Mortgage Agent team so we can discuss your situation and help find solutions. If you’re newly separated and single, there are lots of decisions to be made so let us ease the burden by helping you understand your best options!
Recent Comments