When a relationship ends, deciding what happens to the family home can be one of the biggest financial decisions both parties face.

Selling the property and dividing the proceeds is one option, but it may not be the only option.

If one spouse wants to remain in the home, a spousal buyout may allow that person to purchase the other spouse's interest in the property and restructure the mortgage into their own name.

Whether this is possible depends on the property's equity, the agreed buyout amount, the existing mortgage and the remaining spouse's ability to qualify.

Here's what Ontario homeowners should understand before deciding whether a spousal buyout may be an option.

What Is a Spousal Buyout Mortgage?

A spousal buyout is a mortgage strategy that may allow one spouse to remain in the family home after a separation by purchasing the other spouse's ownership interest.

Instead of selling the property to a third party, the spouse keeping the home may arrange new mortgage financing to:

  • Pay out or restructure the existing mortgage
  • Pay the departing spouse their agreed share of the home's equity
  • Potentially address certain eligible joint financial obligations where permitted by the lender and mortgage program

The exact structure depends on the circumstances and lender requirements.

How Does a Spousal Buyout Work in Ontario?

The process generally starts by determining the current value of the property and reviewing how much is still owing on the mortgage.

The parties will also need to establish the amount of equity being transferred as part of their separation agreement.

For example:

  • Estimated home value: $800,000
  • Existing mortgage balance: $400,000
  • Estimated equity before other adjustments: $400,000

If the spouses agree that one party is entitled to $200,000 of that equity, the spouse keeping the property may need mortgage financing sufficient to deal with the existing mortgage and the agreed buyout amount.

This is a simplified illustration only. Legal agreements, property ownership, debts, mortgage qualification and lender requirements can all affect the actual transaction.

Do You Have to Qualify for the Mortgage on Your Own?

Generally, the spouse keeping the home must be able to qualify for the new mortgage based on the borrowers who will remain on the financing.

A lender may review factors including:

  • Income
  • Employment or self-employment
  • Credit history
  • Existing debts
  • Property value
  • Mortgage amount
  • Property taxes
  • Heating or applicable housing costs
  • Other financial obligations

This is why it is helpful to review the mortgage numbers early in the separation process. Knowing whether the financing is realistic can help inform discussions before the parties finalize decisions about the property.

What Documents May Be Needed?

Requirements vary by lender and situation, but a spousal buyout may involve documents such as:

  • Separation agreement
  • Agreement of purchase and sale or transfer documentation where applicable
  • Property appraisal
  • Current mortgage statement
  • Income verification
  • Employment documentation
  • Identification
  • Information about existing debts

Additional legal or lender documentation may also be required.

What Happens to the Existing Mortgage?

The existing mortgage normally needs to be reviewed as part of the transaction. Depending on the mortgage and lender, considerations may include:

  • The outstanding mortgage balance
  • Current interest rate
  • Remaining mortgage term
  • Prepayment penalties
  • Existing secured lines of credit
  • Whether the current lender can accommodate the transaction
  • Whether new financing with another lender is required

The lowest advertised rate is therefore not necessarily the only consideration. The overall structure of the transaction matters.

Can Joint Debts Be Included?

Certain spousal buyout structures may allow eligible debts connected with the separation to be addressed as part of the financing, subject to lender and mortgage-program requirements.

This must be reviewed individually. Do not assume that all debts can automatically be included.

Why Review the Mortgage Before Finalizing the Buyout?

A separation agreement may establish what each spouse is entitled to, but the mortgage still has to work financially. Reviewing the financing early can help answer important questions such as:

  • How much financing may be required?
  • Can the remaining spouse qualify?
  • What could the new mortgage payment look like?
  • Are there penalties associated with the existing mortgage?
  • Is keeping the property financially sustainable?

The objective is not simply to complete the buyout. The resulting mortgage should also be manageable for the homeowner going forward.

What If a Spousal Buyout Doesn't Work?

A spousal buyout will not be appropriate or possible in every situation. Depending on the circumstances, alternatives may include selling the property, restructuring other financial obligations, or exploring another financing strategy.

Mortgage advice should also be coordinated with appropriate independent legal advice when dealing with separation and property ownership.

Thinking About a Spousal Buyout?

If you are considering keeping the family home after a separation, reviewing the mortgage numbers early can help you understand what may be possible before making major financial decisions.

I can help you review the mortgage, available equity, estimated financing requirement and potential lender options.