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Record high living costs and slumping real disposable incomes are straining marriages, with money woes remaining a leading cause of divorce.

Particularly for parents, the dread of losing the family home can leave them unwilling to leave a less-than-blissful union. But when splitting up becomes unavoidable, there’s a solution: the spousal buyout.

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A spousal buyout is a way to refinance your home to pay out a spouse or common-law partner.

The new mortgage pays out your existing mortgage and debts, if any, and then your lawyer splits any extra cash between the two parties. Your spouse comes off title, and the home is all yours.

As a quick example, assume your house is worth $500,000, your existing mortgage is $400,000 and you have a separation agreement that requires you to share $30,000 of other costs or debt with your ex.

That leaves $70,000 of equity, which the spouses typically split 50/50 (i.e., $35,000 each).

As a result, the new mortgage would need to be roughly $400,000 + $30,000 + $35,000 = $465,000, or 93 per cent of the home value.

How to arrange a spousal buyout

Here’s what you generally need to pull it off:

  • Sufficient equity — A spousal buyout lets you borrow up to 95 per cent of the home value, if you qualify (the maximum you can borrow, as a percentage of the home’s appraisal, falls once the value exceeds the $500,000 and $1 million thresholds).
  • A fully executed separation agreement outlining the division of the matrimonial home
  • A lawyer-drafted purchase agreement
  • Both spouses on title
  • A full appraisal
  • Respectable credit (a 680-plus credit score isn’t mandatory, but it makes life easier)
  • A good enough job to pay the mortgage on your own

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If your income — including spousal support — doesn’t cut it, find a co-signer or fatten the down payment. Perhaps your relatives or a new partner can lend a hand to help you qualify for new financing.

With a spousal buyout, down payment confirmation typically isn’t necessary as the down payment comes from the existing equity in the home. But, if the new mortgage isn’t enough to pay out the other owner and get them off title, you’ll need to come up with a separate source of cash to close.

What else to consider

  • If there’s an existing mortgage on the property, it and any fees or penalties can be paid out with the new mortgage. 
  • Spousal buyout mortgages can be used to pay off other debts, too — if those debts are joint and in the separation agreement.
  • If you need to borrow more than 80 per cent of your property value, default insurance premiums apply.
  • If the purchasing spouse has difficulty qualifying at a mainstream lender due to the lender’s debt ratio limits, mortgage brokers have numerous alternatives with more flexible limits, albeit at higher interest rates. At least 20 per cent equity is required in such cases.
  • Spousal and child support count as income in most cases.
  • If you separate and have money in an RRSP, you may be able to withdraw up to $35,000 under the Home Buyers Plan.
  • If you’re old enough and equity-rich, a reverse mortgage can pay off a spouse — with no required monthly payments.
  • Spousal negotiations can take a while. Minimize rate risk by getting a free pre-approval/rate guarantee while you’re waiting.
  • While this story is about spousal buyouts, in fact, any qualified borrower on title can buy out the other with their consent.

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