What Happens to Your Mortgage in a Divorce?

Divorce can be contentious and messy, but figuring out what to do with your mortgage and home doesn’t have to be. Learn your options and how to navigate sticky housing decisions during a split.

Over 40% of Canadian marriages end in divorce[1], a process that requires couples to jump through multiple legal and emotional hoops before they can move on with their lives.

For couples who are homeowners, divorce also means deciding what will happen to their matrimonial home (and the mortgage).

In May, the average home price in Canada was $699,117, according to the Canadian Real Estate Association[2]. But in some high-cost metros (think Vancouver and Toronto), average home prices surpass $1 million — meaning there may be a significant amount of money — and debt — at stake in a divorce.

So how exactly does your mortgage get factored into the divorce agreement, especially if you and your spouse don’t agree on who should keep the home? Knowing your options can help keep things amicable in the tough conversations ahead.

Legal options for your mortgage in a divorce

While divorce law is a federal matter in Canada, property division — including your home and any loans that secure it — follows provincial or territorial law. And in most provinces, a matrimonial home (regardless of who’s on the home loan or title) is considered a joint asset and is typically split down the middle, says Al Ladha, a mortgage agent with Mortgage Alliance in Toronto.

With that in mind, here’s a breakdown of some housing scenarios that could play out in a divorce or common-law separation.

Spousal buyout

If one spouse wants to stay in the home, they can buy out the other spouse’s share of the home equity, effectively taking over full ownership.

The spouse who wishes to keep the matrimonial home can get a spousal buyout mortgage, sometimes called a marital home buyout or equity buyout. This option enables certain borrowers to refinance up to 95% of the property’s value to buyout their partner.

A spousal buyout mortgage is only available if:

Both spouses are jointly listed on the property’s title.
There’s a separation agreement in place.
The spouse staying put has sufficient income and good credit to qualify for the refinanced loan.

If the spouse wanting to keep the home doesn’t earn enough money or have a high enough credit score to qualify for a loan by themselves, they may need help from a family member to co-sign for the new loan, Ladha says.

Sell the house

Selling your home and splitting the net proceeds — what’s left after the mortgage is paid off — is the most straightforward way to go. Keep in mind that closing costs and real estate commissions will also take a bite out of the overall profits. And unless there’s a prenuptial agreement in place stating otherwise, you and your soon-to-be ex will split the remaining equity evenly down the middle.

Co-ownership

A less common option is for both spouses to continue co-owning the home because of financial issues, or so they can wait for a better time to put it on the market.

In this instance, you and your spouse must inform your lender about the divorce or separation and provide a copy of the separation agreement that outlines how the property will eventually be divided, Ladha says.

Continuing to co-own with your spouse during divorce proceedings could become problematic if one of you fails to contribute your share of the mortgage payment. This could result in late payments and default, risking the home (and its equity) to foreclosure.

Nerdy tip: Canada doesn’t assess capital gains taxes on profits from the sale of a principal residence, though you do have to report the sale on your taxes for that year. If you and your partner share a second home or investment property, that property is likely subject to capital gains tax.

How a prenuptial agreement factors into the equation

In some cases, couples have a prenuptial agreement in place that overrides the matrimonial home being split 50/50.

For instance, if your prenup states one party doesn’t have a claim to the home because they’re receiving another asset upon separation, such as money in a savings or investment account, they wouldn’t have a legal claim to the home or its equity, Ladha points out.

Tips for a smoother mortgage resolution during divorce

Going through a divorce can be painful and messy, but if the financial side of things gets contentious and requires litigation to find solutions, that’s more money out of your pocket, Ladha warns.

“A lot of times, I’ve had couples sitting in front of me prior to them coming up with a separation agreement, and one of my No. 1 pieces of advice to them at that time is …let’s do this amicably. Let’s do it according to the law,” Ladha says, adding, “because if you don’t do it amicably, there’s going to be legal fees, and there’s going to be a lot of them.”

Here are some tips to reduce friction when negotiating your mortgage debt during divorce:

Maintain open communication. Discuss your wishes and concerns openly and honestly with your spouse. Consider involving a mediator to help the process along and act as a neutral guide to the conversations to find common ground.
Seek professional help. During a divorce, you and your spouse should each have your own solicitor to represent your interests. Additionally, it may be helpful to consult with a financial advisor to understand the ramifications of certain mortgage outcomes.
Gather documentation. Keep a copy of your separation or divorce agreement, the prenuptial agreement (if you have one), recent mortgage statements, tax records and a recent property appraisal handy for negotiations.
Keep your lender informed. Make sure your lender knows what’s going on and find out if they have any specific procedures for transferring title ownership and refinancing out of a joint mortgage. When you have a separation or divorce agreement, they’ll need a copy of it.