Separation, Divorce and Your Mortgage: Options in Canada

RefinancePro.club

Separation, Divorce, and Your Mortgage: Navigating a Complex Situation

Separation or divorce affects every aspect of financial life, and the mortgage on the family home is often the most significant item to manage. In Quebec, the unique legal framework of the Civil Code of Quebec (CCQ) and family patrimony rules add layers of complexity. Whether you want to sell the property, buy out your ex-spouse's share, or maintain the status quo, each option has significant mortgage, legal, and financial consequences.

The Legal Framework in Quebec: Family Patrimony

In Quebec, the family residence is part of the family patrimony (art. 414-426 CCQ), which is divided equally between spouses upon divorce, regardless of who is the registered owner. For common-law partners (unmarried), the family patrimony rules do not apply; division depends on the ownership registered at the Land Registry. This distinction is fundamental as it determines who is entitled to what. The court may also grant temporary use of the family residence to the spouse with child custody (art. 410 CCQ), but this does not affect mortgage obligations.

Option 1: Sell the Property

Selling is often the cleanest solution. The sale proceeds, after repaying the mortgage balance and the prepayment penalty, are divided between the ex-spouses according to the agreement or judgment. The penalty is calculated by the lender using the standard rules (IRD or three months' interest). Discharge fees of approximately $300 to $600 and notary fees are added. The main advantage is a clean break: both ex-spouses are freed from all mortgage obligations.

Option 2: Buy Out the Ex-Spouse's Share

If one spouse wishes to keep the property, they must buy out the other's share. This generally involves refinancing the mortgage to remove the co-borrower and, if applicable, unlock the funds needed for the buyout. The refinance constitutes a break of the existing mortgage, triggering the penalty. The buying spouse must qualify alone under OSFI criteria (Guideline B-20), including the stress test at the higher of the contractual rate plus 2% or the floor rate. Court-ordered support income may be included in the qualification calculation according to lender policies.

Option 3: Temporarily Maintain the Status Quo

Some couples choose not to modify the mortgage immediately, especially when the term is about to expire or market conditions are unfavourable. This approach avoids the penalty by waiting until the end of the term, but it carries significant risks: continued joint liability, dependence on the ex-spouse for payments, and complications if either party wants to purchase another property (the existing loan counts in debt ratio calculations).

The Mortgage Broker's Role in Separation Situations

An AMF-certified mortgage broker is a valuable ally in a separation situation. They can objectively assess each spouse's options, calculate penalties and refinancing costs, compare offers from multiple lenders, and help the buying spouse qualify. The broker can also coordinate with the notary, family mediator, and lawyers to ensure the mortgage aspect is handled efficiently within the overall separation framework. Under the LDPSF, the broker must act in their client's best interest and present all available options transparently.

Frequently Asked Questions

What happens to the mortgage during a separation in Quebec?

The mortgage does not disappear with the separation. Both co-borrowers remain responsible for the loan until the contract is modified. Options include selling the property (with a potential penalty), buying out the ex-spouse's share through refinancing, or temporarily maintaining the status quo pending an agreement or court ruling.

Can my ex-spouse be removed from the mortgage without refinancing?

This is extremely rare. Most lenders require refinancing to remove a co-borrower, as it changes the loan's risk profile. The spouse keeping the property must demonstrate they can handle payments alone and qualify under OSFI criteria (Guideline B-20), including the stress test.

Is the break penalty shared between ex-spouses?

The sharing of the penalty depends on the separation agreement or divorce judgment. Under Quebec's family patrimony rules (art. 414-426 CCQ), debts related to the family residence, including the penalty, may be deducted from the shareable value of the asset. In practice, the penalty is often covered by the sale proceeds or shared by agreement between the parties.

Can I stay in the house with the children even if I am not on the mortgage?

In Quebec, the court can grant the right to use the family residence to one spouse, especially if they have custody of the children (art. 410 CCQ). However, this does not modify the mortgage contract. The lender continues to hold both co-borrowers responsible for payment. It is essential to regularize the mortgage situation within a reasonable timeframe.

Does a share buyout trigger a penalty?

Yes, in most cases. Refinancing to buy out an ex-spouse's share constitutes a break of the existing mortgage, which triggers the prepayment penalty. However, if you complete the buyout with the same lender, some offer blend-and-extend or preferential terms for separation situations.

How do I qualify alone for the mortgage?

The lender will assess your individual income, personal debts, and credit score. It is necessary to pass OSFI's stress test (contractual rate + 2% or floor rate, whichever is higher). If your income alone is insufficient, a guarantor, co-signer, or court-ordered support payments may be considered depending on the lender's policies.