Its time to prepare for the worst but plan for the best – what happens with your home and financing if you and your spouse split or one of you passes away?
We are back with our final post in this Home Ownership series. When we started this, we had no idea we would learn so much about buying a home. Whether it was the money, people or emotions of buying a home, we learned something new with each post. Buying a home symbolizes a new beginning and a fresh start. What happens when that fresh start goes south and life happens?
With four in ten marriages in Canada ending in divorce, it is important to safe-guard your assets. In this post, we will chat with James Loewen of Loewen Mortgage Group about what happens if you and your partner separate or get divorced. We will also talk about what would happen to your home should you or your partner dies. We know this is a topic most people would rather ignore, but because you’ll be going through so much, it is crucial to be prepared and have your paperwork in order.
Hey James! We have some not-so fun things to talk about today. As we all know, the divorce rate in Canada is pretty high. We don’t enter a marriage expecting to get divorced or separate. Before signing a mortgage, what should people do to help protect themselves?
It’s always a good idea of course to hope for the best – plan for the worst as the only certainty in life is uncertainty.
In that spirit when buying with a partner we have discussed that the most successful couples are those that share finances (such as doing budget together, using a joint account) and communicate openly about struggles and their feelings towards money. Lets say however you’re buying with a partner that has $0 down and you are putting $100,000 down which you’d rather NOT share should the relationship end.
Pre-nuptial agreements are the best solution if you are getting married and can outline any condition or caveat to protect each party in the agreement. For example: exclusion of that $100K should you part and sell the home to protect your investment. You can have a sliding scale, such that each year together it decreases by 20% or is even removed after 5 years or having a child together.
Co-habitation agreements, similar in every manner to a pre-nup, are for those buying with a partner but not getting married. These are not only for addressing the equity that builds in a home, but also a good time to list EVERY asset (and liability) that each person is coming into the relationship with and what needs to be protected – or avoid having to split in the case of debts.
While on the topic of protecting yourself – ensure your broker recommends a good lawyer that can help with the closing of your new home as well as prepare a will and a POA (power of attorney) often referred to as your “living will”. During our annual client reviews, we include a review of your will as part of the financial update in case your situation has changed over the year such as the addition of children.
Lastly, your mortgage broker should be reviewing insurance coverage options for life, disability, critical illness, job loss etc. Many banks offer coverage directly for your mortgage – we are very hesitant to recommend and generally advise to NOT take bank offered coverage – instead we advise to take a 3rd party insurance coverage separate from your mortgage provider. We provide this option because at the end of your 5 year term if we decide it best to move lenders, that insurance when you leave your bank or lender will cease and new coverage will need to be applied for. With age insurance increases BIG TIME (and if you’ve had any health issues in that 5 years, well its going up even more). With external insurance coverage independent of your bank or lender, we can then move the mortgage around from lender to lender without having to re apply or risk not being able to obtain coverage again for our clients. Your broker should have access to these 3rd party insurers such as Manulife etc.
Let’s say the soon-to-be divorced couple decides to sell their home. How much is each person entitled to?
The right to equity will be determined by what conditions were put in place in the co-hab or pre-nup as described above. Your 1st step to will be to begin working on a separation agreement based on the current agreements you have in place. One option will also include the potential for 1 person to “buy-out” the other by completing a refinance, which we discussed in an earlier blog or pay out the other party from savings and complete an assumption to remove them off title. This separation agreement MUST be in place in order to execute the refinance to prove financial separation and to protect each party from the other coming back to seek further remedy should the property continue to appreciate.
We are not solicitors, nor offering legal advice (the CYOA statement) but in general most couples will determine the value of the home, reduce the theoretical 5% realtor costs associated that would be lost to realtor fees + HST, subtract the existing mortgage and divide in half (and potentially deduct any debts as well that were incurred or split such as a line of credit etc). We can then refinance the mortgage and have the solicitor provide these funds at closing to satisfy the conditions of the separation agreement.
IF they are selling, then the above is again usually followed with each party then again dividing the proceeds from the sale per the separation agreement details that have been agreed upon.
Would the same apply for common-law couples?
In general – yes. In the eyes of the courts, if you’re filing as common law then you are spouses to one another and even though the document won’t be a separation agreement, you’ll still want to have a solicitor prepared and signed document outlining the splitting of the assets and agreeing upon financial separation to again protect yourself from a partner coming back again in the future to seek further money.
It’s a thought none of us want to think about; the death of a partner. What should we do now to help ensure that our home and finances are okay during this time?
It’s a difficult time and hopefully your broker has taken the time to review insurance options with you at your closing or referred a trusted insurance expert to review mortgage insurance, term insurance, whole life, universal life etc. with you and you’ll have that coverage in place to remove the further financial burden. In most policies, with the death of 1 partner the entirety of the mortgage outstanding would be repaid back to the lender / bank and you’d then be left with a house mortgage free. Should you experience the passing of your partner, reach out to your broker with a copy of your death certificate and they will assist you in processing your claim from there.
Should you have elected to not take any coverage at all – which I would like to take this time and consider something with me: at closing you MUST obtain home (fire) insurance. You’re thinking, “well of course James, everyone knows that and even if I didn’t, I would still get it just in case my house burned down!” Ok, think for a moment of how many people you know that have had their house burn down? Is it 2 … maybe 1 … or perhaps you don’t actually know ANYONE who’s had a house burn down?
NOW, I want you to think (and sorry this is morbid) but do you know of anyone that has died?
It’s a comparison I hope points out the necessity and sadly the higher probability that we’ll unexpectedly either be disabled or worse in our lives and that good coverage to protect yourself and loved ones is just as, if not more important. If you think to yourself at closing “well I can’t afford that extra $75 a month for coverage” – then you shouldn’t be buying a house in the first place if your budget is that tight, you’re definitely NOT going to be able to afford it should anything happen after closing.
If your partner passes without coverage, you’ll need to qualify now to carry the home on your own – if you cannot then you’ll be forced to sell. The last thing I would wish on someone who is mourning the loss of a loved one is to also be forced from keeping your home.
Is there anything else people should know about their home and divorce/separation/death of a spouse?
Having worked with many couples that are parting, my recommendation is to stay as amicable as possible and communicate as best you can towards an end goal (tough I know during this trying time). Use the services of a mediator or arbitrator and stay out of the courts – its only going to end up in costly legal bills eating into your equity that you’re fighting for in the 1st place.
We also strongly recommend that if you and your partner are seeking to buy one of the other out and purchase your next home in the same transaction – use the same broker for both of you.
The intricacies of working the financing and conditions that will be put in place is much easier when we are working and have a full working knowledge of both parties involved. You do not have to come to the office at the same time, nor will we be discussing one partner to the other as privacy act prevails – but should 1 thing not execute properly it can cause a domino effect of disaster for everyone.
An example this past week: Client C and V owned 2 homes, each on title of both home and were parting ways now. Client C was buying a new home with his new partner P. The transaction was such that in order to qualify client V had to refinancing to remove C from her house title and take out equity to give to C. Client C was taking over the other home to become a rental now – which we were also refinancing at the same time taking V off title, adding on new client P to qualify but only as guarantor to allow partial rebate as a 1st time home buyer on the new purchase, taking equity out from this home for down payment on the new purchase for C & P together as their primary house. (Confusing I know) Had any part of the refinances or removing persons off title of each home not executed perfectly – the entire transaction would have crumbled into a legal nightmare. Thankfully – all parties were working together with us and we could quarterback with solicitors and all moved forward as planned on closing date.
My last parting advice as someone who’s parents parted ways at a young age: think of your children. You will still need to be involved together with your kids when they have hockey or dance and when school holidays occur. When you move through their lives you are setting the stage as an example of what love can be – and that it sometimes might not work. Though you may not “like” your ex, remember you have impressionable eyes watching you and that other person (though a bastard to you) is still a mother or father to your little one.