Divorce or separation is a life-changing event that frequently results in financial difficulties, especially when it comes to distributing joint assets such as the family house.
A spousal buyout can be an efficient way for one partner to maintain property ownership while compensating the other. However, this approach needs a good strategy, financial credentials, and expert assistance. As a mortgage broker, my job is to guide clients through this difficult process with confidence and clarity.
What Is a Spousal Buyout?
A spousal buyout allows one partner to refinance the home in their name, using the equity in the property to compensate the departing partner.
In Canada, the Spousal Buyout Program permits borrowing up to 95% of the home’s appraised value, making it a feasible option for many couples. However, success depends on meeting specific requirements and qualifications.
Requirements for a Successful Spousal Buyout
To proceed with a spousal buyout, the following are typically required:
- Sufficient Equity in the Home
A spousal buyout relies on the home’s equity, which must be enough to cover the departing partner’s share. Borrowing up to 95% of the appraised value is possible under the program, but limits may decrease as property value exceeds $500,000 or $1 million. - Separation Agreement
A fully executed separation agreement drafted by a lawyer must outline the division of the matrimonial home and other joint assets. This document is essential for lender approval. - Purchase Agreement
A legal purchase agreement transfers ownership of the property to the remaining partner. - Creditworthiness
While a credit score of 680 or higher simplifies the process, alternative lenders may offer options for those with lower scores, albeit at higher interest rates. - Proof of Income
The purchasing partner must demonstrate sufficient income to cover the new mortgage. Spousal and child support payments are often counted as income, and a co-signer can be added if needed to meet qualification criteria. - Full Appraisal
An independent appraisal determines the fair market value of the home, which is critical for calculating equity and loan eligibility. - Legal and Financial Flexibility
A mortgage broker can help find solutions if additional funds are needed, such as leveraging an RRSP withdrawal under the Home Buyers’ Plan or exploring a reverse mortgage for equity-rich individuals.
Additional Considerations
- Debt Management
A spousal buyout mortgage can also be used to pay off joint debts outlined in the separation agreement. Consolidating these debts simplifies finances and improves future borrowing capacity. - Handling Existing Mortgages
Any existing mortgage, fees, or penalties can be paid out through the new financing. This ensures a clean financial slate for the departing partner. - Default Insurance
Borrowing more than 80% of the home’s value will require default insurance premiums, which should be factored into the costs. - Flexible Lending Options
Mortgage brokers have access to alternative lenders with more lenient debt ratio limits for those who struggle to qualify with traditional lenders. While these options may have higher interest rates, they can provide the necessary flexibility. - Protect Against Rate Changes
Spousal negotiations can take time. Securing a pre-approval with a rate guarantee helps protect against potential rate increases during this period.
How a Mortgage Broker Helps with Spousal Buyouts
As a mortgage broker, I streamline the spousal buyout process by providing:
- Customized Solutions
Whether it’s identifying alternative lenders or structuring the mortgage to meet specific financial needs, I tailor solutions to fit your circumstances. - Access to Competitive Rates
My network includes lenders who specialize in spousal buyouts, ensuring you get the most favourable terms. - Financial Guidance
I help clients explore options such as leveraging RRSP funds, using reverse mortgages, or adding co-signers to qualify for financing. - Simplified Process
From securing appraisals to coordinating legal documentation, I manage the administrative details so you can focus on your transition.
Example Scenario
Consider Mike and Mary, who own a home valued at $450,000 with a remaining mortgage of $375,000. They agree to divide the equity equally.
- Equity: $450,000 – $375,000 = $75,000
- Mary’s Buyout: Mary wants to keep the home. Under the Spousal Buyout Program, she refinances the property for 95% of the appraised value ($427,500).
- Down Payment: Mary uses her share of the equity ($37,500) as the down payment. After covering $30,000 in joint debts, Mary retains sole ownership of the home, while Mike walks away with $22,500 to start over.
A spousal buyout is more than just a financial transaction; it is a means to achieve stability and independence during a difficult life change. Working with a mortgage broker provides professional advice, specialized solutions, and a more streamlined overall process.
If you’re considering a spousal buyout, contact me today for a free consultation. Together, we’ll explore your options and secure a solution that supports your financial goals.
