Going through a divorce is a complicated and emotional experience enough as is, especially when children are involved.
But going through a divorce in Toronto’s hot housing market during a pandemic as mortgage interest rates rise? The challenges when it comes to how to afford to live apart can seem insurmountable.
While the average home price in Toronto has dropped by three per cent over the last three months — it still sits at a cool $1.21 million. The cost of renting, meanwhile, is steadily rising.
In the past, to deal with the matrimonial home — the legal term used to describe the home occupied by both spouses at the time of separation — one of the parties would often look to buy the other out.
But experts are warning those days may be behind us, at least for now — for many, rates will be too high to qualify for a mortgage, and high mortgages taken on during the past few years will make it almost impossible for one party to afford the home solo.
“They’re not going to be able to meet the stress test that’s in place … the ability to proceed is simply not there. And, that’s just the reality of circumstances,” says Kevin Caspersz, senior associate lawyer at Shulman and Partners LLP.
The stress test is a way for borrowers to determine exactly how much you could afford to pay toward a mortgage if your income was reduced or you lost your job.
With children in the picture, there’s often a shared desire to keep the home, or find a similar type of housing at a nearby location, to keep consistency for the kids, says Caspersz. But that’s also become more difficult, with rising rents and sky-high condo prices.
“If they (the kids) are living in a large, detached home with multiple bedrooms, it’s going to be a very big challenge for them to transition to a condo. That’s a concern parents are going to have.”
Elke Rubach, president at Rubach Wealth, says she’s done financial planning for many separating couples who can’t afford to move out to begin with, so both parties remain in the home.
“People have committed to superlarge mortgages and they can’t afford them, period. And they certainly can’t afford them separately,” says Rubach.
Sometimes couples might pick upstairs or downstairs, she says. Couples with children will keep the home for the kids and split a rental they alternate living in. There are endless variations on how couples handle sharing the space, she adds.
What happens to assets like the family home when a couple divorces depends on whether there was a pre-nuptial agreement in place.
Without one, generally speaking, any assets and debts that accumulate over the span of the marriage are subject to division between the parties.
When home-sale prices are high, one party might be more eager than the other to sell, but the matrimonial home can only be sold with written permission from each party, says Caspersz.
Parting couples might also not agree on the sale price. In that instance, the court could order the home to be sold and divide the proceeds.
“At the end of the day, the cake is only so big and it will shrink depending on how ugly you fight,” Rubach says, meaning that a couple’s net worth will only dwindle the more they engage in legal battles.
To avoid getting to that stage, Rubach says, it involves “removing the emotion from a very emotional experience.”
Experts agree that the best way to do that is to create a marriage contract in advance of any large, shared purchases.
A marriage contract, Casperz says, is either a pre-nuptial agreement or an agreement entered into during the marriage, which is essentially a pre-nuptial agreement that’s just entered into later.
These documents can help alleviate uncertainty because they outline details on how to handle issues that might arise if the relationship ends, such as how to deal with the shared home.
“You could talk about all the scenarios on how to deal with the home when you’re not in a state of conflict, and document that,” Caspersz says.
“Maybe you’ll never have to rely on that contract. And that would be great and it’s what we hope for. But in the case that you do, there won’t be contention, because you’ve already agreed to the procedure and the terms that you’re going to follow to deal specifically with the matrimonial home.”
Eva Sachs, a chartered financial divorce specialist at Eva Sachs Divorce Financial Consulting, urges couples not do anything rash around real estate before a separation agreement has been made.
A separation agreement is a legal contract between a couple that details how they’re going to settle issues related to their separation. This might include details about parenting decisions, where children will be living, child support, how property (assets and debts) will be divided, and spousal support, Sachs says.
She sometimes sees couples rush to sell and buy new properties, especially in the recent hot housing market, because they feel their options are shrinking and will only shrink further.
In doing so, they might find themselves in financial difficulty, she says, because they didn’t wait for a separation agreement to be finalized, and may find they have costs they hadn’t anticipated.
“You have to get a sense of what assets you’re left with, what financial plan you’ve got in regards to assets, what’s the new budget going forward with either paying support obligations or receiving that, and getting a sense of what that feels like,” Sachs says.
Getting all of this information together takes time because separation agreements don’t happen quickly, she adds.
Even if one partner does get the financing to keep the home, it’s not always a happy ending. They may not have a grasp of the costs beyond the monthly mortgage, like renovations or repairs, which can be a lot for one person.
“From my experience doing this work for a long time, divorcing couples don’t think of those things,” Sachs says.
The best-laid plans can get complicated, she adds, such as moving forward with a decision to rent the basement for extra cash, because people underestimate renovation costs and create an unrealistic budget.
When it comes to buying again, many divorced couples might feel they’re starting from scratch, as they don’t have the same financial opportunities as first-time homebuyers.
For example, the $5,000 Home Buyers’ Amount tax credit will not apply for anyone having owned a home in the current year or the previous four years.
Some cities and provinces offer land-transfer tax rebates, but these are generally for those who have not owned a home before, says Jason Heath, managing director of Objective Wealth Partners Inc.
However, Heath says, in 2020 there was a change to allow divorcing couples to qualify for the Home Buyer’s Plan as first-time homebuyers. Prior to that, you could only qualify if you had not owned a home in the current year or the previous four years.
Following a relationship breakdown, whether you were married or common-law, he says, you can take up to $35,000 out of your Registered Retirement Savings Plan tax-free to put toward the purchase of a home.
“Regardless, it can be tough to afford a home after a relationship breakdown, especially in some of Canada’s more expensive cities. When you divide assets with a spouse and apply for a mortgage on a single income, it changes housing affordability quite a bit,” he says.
“I would be cautious about buying a new home after a divorce generally. But now, there are additional risks, like a weakening real estate market and high interest rates. It can be tough enough financially going through a divorce, let alone biting off more house than you can chew.”
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