The impact of separation or divorce on a family is long-reaching; not only does it stir emotions from all involved, but it can also take a devastating toll on personal finances. The separation of assets is usually an important step in this procedure. In many cases, homeowners feel their only way to move on is to sell their home & separate the equity they’ve built, but there is another little-known 2nd option.
Over the last few years, the government has made it more difficult to pull equity out of a home through refinancing. Current mortgage rules only allow a homeowner to pull up to 80% of the equity from their property. This can make it difficult to divide equity between spouses without a sale. This decision must be made very carefully, when children are involved pulling up roots is likely not in their best interest. Now lenders are able to offer a spousal break-up program that can allow one spouse to stay in the home & withdrawal up to 95% of the equity. Not to mention the savings by avoiding real estate fees.
To pull this equity out there must be a signed separation agreement in place outlining how the money is to be paid out. This will allow the underwriter to have full visibility of any alimony or child support payments, as the payments would need to be calculated into the debt calculation requirements. The lender is only allowed to payout matrimonial debts listed in the separation agreement and any penalties/discharge fees associated with the existing mortgage. Direct payouts to the leaving spouse are not permitted.
One of the other challenges faced is affordability, it can sometimes be difficult for one spouse to qualify for the new mortgage on their own. In this case, the lender will allow you to add a co-borrower/co-signer (must be a direct relative) to the application in order to better support the lender’s income requirements. This individual must have good credit and disposable income beyond their own monthly financial obligations. This person must also understand that they would be required to take over the mortgage if the loan goes into default.
Even though this looks like a refinance transaction the lender will require a purchase agreement between the spouses to be drawn up & signed. This allows the lawyers involved to easily remove the one spouse from the title of the property.
If you or someone you know is facing the challenge of separation it is always best to contact a Mortgage Broker for a complimentary consultation. They will be able to determine your best mortgage options by working through the various scenarios and help you make the best financial decision available.
If you live in the Barrie, Ontario area I’d be happy to set an appointment at my office 99 Bayfield Street to discuss your options and detail a plan to move forward. You can call me at (705) 737-6161, (888) 737-6162 or by email at . Alternatively, you can find more information about mortgage financing at www.darrenrobinson.ca.
Written By Darren Robinson