Spousal Buyout in Canada: How to Keep Your Home After Separation
Separation and divorce bring a long list of financial decisions, and one of the biggest is what happens to the matrimonial home. For many Canadians, their home is their most significant asset, and selling may not be a practical option. A spousal buyout offers an alternative to selling, allowing one partner to keep the property while compensating the other for their equity share.
A spousal buyout can offer stability during a major life transition, but it also comes with financial and mortgage-related hurdles. The partner keeping the home needs to qualify for the mortgage on their own, arrange a payout based on the home’s current value and existing equity, and complete legal transfer of ownership.
Key Takeaways
- A spousal buyout lets one partner keep the home by paying out the other partner’s share of the equity.
- The remaining partner takes on a larger mortgage that includes both the remaining mortgage balance and the equity payout.
- Alternatives to a spousal buyout include selling the home, temporary co-ownership, or adding a co-signer.
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What Is a Spousal Buyout?
A spousal buyout allows one partner to keep the home after a separation or divorce by buying out the other partner’s share of the equity in the property. A spousal buyout is a specific type of refinancing that is one of the most common ways couples divide the equity built, without selling. One partner chooses to keep the property and must qualify for a mortgage, pay out the other partner’s share of the equity, and legally transfer the ownership into their name. A spousal buyout is usually treated as a purchase, allowing you to borrow up to 95% of the home’s value.
Spousal buyouts apply to both legally married and common-law partnerships; however, legal rights and the process involved can vary significantly by province. For example, common-law partners in some provinces may not have the same automatic property rights as married spouses. Consulting a family law lawyer in your province before proceeding is strongly recommended.
How a Spousal Buyout Works
A spousal buyout allows the spouse who plans to remain in the home to obtain up to 95% of the home’s equity through an insured refinance, rather than the traditional 80%. All three of Canada’s mortgage default insurers offer spousal buyout programs, allowing one spouse to retain ownership of the home and pay out the other spouse’s share of the equity.
Separation and Determining Who Stays in the Home
The process typically starts with a separation agreement that outlines how assets will be divided and who intends to remain in the property. The partner remaining in the home must be in a position to take on a mortgage, including meeting lender requirements for income, debt service ratios, and the mortgage stress test. In many cases, this step involves early conversations with a lender or mortgage professional to confirm whether keeping the home is realistic before moving forward with the rest of the buyout process.
Property Valuation Determines the Buyout Amount
The next step is determining what the property is worth. A professional home appraisal will be required to establish the fair market value at the time of separation. From there, the remaining mortgage balance is subtracted from the home’s value to calculate total equity. The equity is then divided 50/50 or in accordance with the terms of the separation agreement, and is the buyout amount owed to the other partner. The portion of the equity owed is added to the remaining balance on the current mortgage to determine the amount required for a new mortgage.
Mortgage Requalification Is Required
Before the buyout can be finalized, the remaining partner must qualify for the mortgage under current lending guidelines. The lender will reassess income, employment, debt service ratios, and complete a mortgage stress test. The lender will confirm that the borrower can comfortably cover the new mortgage payment, property taxes, heating costs, and any other existing debts. If the numbers no longer work under today’s rates, the buyout may require a larger down payment, a parent to co-sign or act as guarantor, or a different plan altogether.
The Remaining Partner Buys Out the Other
Once the mortgage is approved, the new mortgage will replace the existing one, removing the departing partner from both the mortgage and title. It will include the funds needed for the payout, plus any other debts specified in the separation agreement. The remaining partner proceeds with buying out the other’s share of the home’s equity. The buyout typically involves a lump-sum payment based on the equity split agreed to in the separation agreement.
For example, if the home is worth $600,000 and the mortgage balance is $300,000, the equity in the home is $300,000. If the separation agreement is for a 50/50 split, the partner remaining in the home would owe the other partner $150,000 of the equity. The new mortgage would be $450,000, incorporating the remaining mortgage balance and the equity owed.
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Costs to Expect for a Spousal Buyout
A spousal buyout involves more costs than just paying out your partner’s share of the equity. There are additional costs to consider that can impact the overall affordability of keeping the home. There is also the possibility that you will have a higher interest rate to factor in compared to the current mortgage. You may also need to factor in the premium for mortgage default insurance if you are borrowing more than 80% of the home’s value.
Costs to expect when completing a spousal buyout could include:
- Legal fees for title transfer and the separation agreement
- Appraisal costs to determine the current property value
- Mortgage penalty for breaking the existing loan early
- Other administrative fees
Pro Tip: When no equity payout is required, the remaining spouse may qualify for a release of covenant with their lender. A release of covenant allows you to remove your ex-partner from the mortgage without refinancing, helping avoid costly prepayment penalties.
Tax Implications of a Spousal Buyout in Canada
In most cases, a spousal buyout of a principal residence does not trigger capital gains tax, as the Canada Revenue Agency (CRA) allows a principal residence exemption (PRE) that shelters the home from capital gains when sold or transferred. However, if the home has been used partially for rental or business purposes at any point, the exemption may not apply in full, and a portion of the gain may be taxable. The transfer must also be completed at fair market value (FMV) and properly documented in the separation agreement.
Under the Income Tax Act, property transfers between spouses or common-law partners as part of a separation or divorce can typically be made on a tax-deferred basis, meaning no immediate tax is triggered at the time of transfer. Any future capital gains upon the eventual sale of the property, however, remain the responsibility of the receiving spouse. Given the complexity of tax rules, consulting a tax professional or accountant alongside your legal and mortgage expert is strongly recommended before finalizing a spousal buyout.
What to Do If a Spousal Buyout Is Not Possible
A spousal buyout is not always financially feasible, and it’s important to consider alternatives if one partner cannot qualify for the mortgage alone or the overall costs are too high.
Selling the Home and Dividing the Proceeds
Selling the property is often the most straightforward option. Once the home is sold, the remaining mortgage is paid off, and any equity is divided according to the separation agreement. While this may not be the preferred outcome, it removes the pressure of one person to qualify for a larger mortgage. It provides both parties with liquidity to move forward independently.
Co-Ownership for a Defined Period
In some cases, both partners may choose to keep the home and remain co-owners temporarily. This can allow time for market conditions to improve, for children to remain in the same home, or for one partner to strengthen their financial position before attempting a buyout later. This approach requires a clear legal agreement outlining responsibilities for mortgage payments, maintenance, and a future exit strategy.
Bringing in a Co-Signer or Guarantor
If qualification is the main issue, adding a co-signer or guarantor can help support the mortgage application. Adding someone else to the mortgage as a co-signer or guarantor can allow the remaining partner to stay in the home even if they can’t meet the lender’s qualification requirements based solely on their income. However, this option introduces shared financial responsibility, which can create risk if circumstances change.
Adding a parent as a guarantor is more beneficial, as it allows the remaining spouse to renew the mortgage in their own name later, avoiding the need to refinance to remove a co-signer from the title.
Renting Out the Property
Another option is to convert the home into a rental property instead of selling or completing a buyout immediately. Rental income can help offset mortgage costs and improve affordability over time. That said, lenders may use only a portion of the rental income for qualification, and managing a rental property entails its own responsibilities and risks.
Frequently Asked Questions (FAQ) About Spousal Buyout in Canada
What is a spousal buyout in Canada?
A spousal buyout is when one partner keeps the home after separation by paying the other partner their share of the equity and taking over the mortgage.
Do you need to refinance for a spousal buyout?
A spousal buyout requires refinancing the mortgage to access equity and remove the other partner from the mortgage title. However, if an equity payout is not required, a release of covenant can avoid costly penalties.
Is mortgage insurance required for a spousal buyout?
If you are borrowing more than 80% of the property’s value for the spousal buyout, the mortgage will require default insurance, allowing you access to lower insured rates and more flexible financing criteria.
How is the buyout amount calculated?
The buyout amount is calculated as the home’s current market value minus the mortgage balance to determine the home’s equity. This equity is then divided between the partners, typically 50/50, though the split may differ under the separation agreement.
Are there tax implications with a spousal buyout in Canada?
In most cases, a spousal buyout of a principal residence does not trigger capital gains tax due to the principal residence exemption. However, if the home has been used partially for rental or business purposes, the exemption may not fully apply.
How long does a spousal buyout take in Canada?
The timeline for a spousal buyout can vary depending on how quickly the separation agreement is finalized, how long the appraisal and mortgage approval process takes, and the complexity of the legal title transfer. In general, most spousal buyouts take anywhere from a few weeks to a few months to complete.
Can common-law partners do a spousal buyout in Canada?
Yes, common-law partners can complete a spousal buyout; however, the legal rights involved vary significantly by province. Unlike married spouses, common-law partners in some provinces do not have the same automatic property rights.
Does a spousal buyout affect my credit score?
A spousal buyout itself does not directly impact your credit score. However, the mortgage requalification process involves a hard credit inquiry, which can have a minor, temporary effect on your credit score. Taking on a larger mortgage also increases your overall debt load, which may affect your credit profile over time. Ensuring you can comfortably manage the new mortgage payments is important for maintaining good credit health going forward.
Final Thoughts
A spousal buyout can help one partner stay in the home after a separation, but it’s not always as simple as agreeing on who stays. The process involves refinancing the mortgage, qualifying at today’s rates, and the additional costs of a larger mortgage balance. For some families, a spousal buyout can provide stability during a major life transition. For others, the best financial move may be to consider alternatives.
A clear mortgage strategy can help determine whether a spousal buyout is realistic, affordable, and sustainable over time, or whether another option makes more sense. If you are exploring a spousal buyout or comparing your options, contact nesto mortgage experts to explore solutions that fit your situation.
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