What happens to a mortgage after divorce?

There’s no stress like the end of a marriage. And one of the least fun parts of the divorce process is divvying up assets.

But it doesn’t end there. If the parties are sharing a mortgage, they’ll also need to divide responsibility for it.

The best way to deal with a mortgage post-breakup can vary by province. But most of the time, in the absence of a prenuptial agreement, responsibility for a mortgage is split equally between the parties.

In Ontario, for example, the law states that the matrimonial home (where the couple lived when married) belongs to both spouses, no matter whose name is on the title.

What to do with a house when divorced

Here are some of the more common ways to handle a mortgage when a marriage has ended.

1. Sell the house.

• The mortgage is paid out and any supplementary funds are sent to a lawyer’s trust account until a Separation Agreement can instruct how the funds are to be dispersed between the parties.
• If the house doesn't sell for enough to pay off the mortgage, both parties are jointly responsible for paying the balance.
  • Note: In many cases (Alberta being one exception), lenders can sue for the balance if it’s not repaid.

2 . One party leaves the house and sells their interest to the remaining party.

• Often referred to as a buyout, the new mortgage is processed as a purchase, even though it's technically a refinance.
• In this case, be sure to compare mortgage rates before re-purchasing with the same lender.
  • Normal minimum down payment rules apply.
  • The lender pays out the remaining party their portion of the equity.
  • A full appraisal is performed.
  • Note: Mainstream lenders will require a legal Separation Agreement before granting the new mortgage.

3. Both parties hold onto the house and continue to pay their share of the mortgage payments.

• This is usually a last-resort option for couples going through divorce, perhaps because they can’t sell the home and neither party can afford to buy the other out.
• This option comes with inherent risks, as each is relying on the other to hold up their end of the agreement and continue making payments.

Costs associated with breaking a mortgage after divorce

It’s important to note that a prepayment charge will likely apply in cases where the existing mortgage is discharged prematurely. This is where variable-rate mortgages come in handy. They usually entail just a three-months' interest penalty for early termination.

Those with a fixed mortgage rate (especially one that’s not from a “fair penalty” mortgage lender) could face a penalty that’s substantially higher. Fixed-rate prepayment charges are typically the greater of three months’ interest or the interest rate differential (IRD).

If you’re a spouse who plans to hold onto the house, it’s important to be realistic about your ability to manage the new mortgage and maintenance costs on your own.

Qualifying for a mortgage is a lot tougher today with only one income, thanks in part to high interest rates and the higher “stress test” rate that the Canadian government imposes.

The individual who keeps the house will also need to pay out the other spouse’s share, as noted above, which can boost the mortgage amount by tens or hundreds of thousands of dollars.

If you’re in this predicament, contact a mortgage broker to scope out your options. If you can’t qualify for a new mortgage with a bank but have 20% or more equity, a broker can recommend non-prime financing. The borrowing costs may be a few points higher than a bank, but that might be the price of keeping your family home.