A Q&A on finding the money you need
When going through a separation or divorce, there can be many unexpected costs: you may have to find new accommodations, buy a car, or simply live without the dual income you were used to. How do you get access to the funds you need? Some couples choose to use equity in their homes. But with this answer comes more questions. Here is everything you need to know about using your home equity during your separation.
First things first
You may already be well aware that when you purchase a property with less than a 20% down payment, your process includes qualifying with your bank’s underwriting guidelines and policies. But mortgage candidates also need to qualify within the underwriting guidelines of the mortgage insurers or mortgage default insurance companies. (This will come into play later on in this story.)
How many mortgage default insurers are there in Canada?
Good question. Easy answer: there are only three! The most commonly known is Canada Mortgage Housing Corporations (CMHC) which is a crown corporation. Two other private insurers exist: Canada Guarantee and Genworth Canada.
If you purchase a property with less than 20% down, the mortgage default insurance known as CMHC Mortgage Insurance will be added to your mortgage loan. However, most Canadian home buyers don’t realise that they probably bought their mortgage default insurance from Canada Guarantee or Genworth Canada.
Does it really matter which mortgage insurer you use?
It actually does! Each one has different underwriting guidelines and policies. As of June 01, 2020, CMHC made their lending guidelines more difficult for buyers by restricting their lending requirements. As a result, Canada Guarantee and Genworth Canada both saw an increase in their business.
Canada Guarantee and Genworth Canada believed that the Canadian housing market would continue to thrive despite the pandemic. Many Canadian home buyers thought they would not be able to purchase a property because of the new restrictions CMHC set forth. However, many were surprised to learn that solutions from Canada Guarantee and Genworth Canada were still available.
Is there an additional cost to use Genworth Canada or Canada Guarantee?
Simple answer: No.
What is the Spousal Buyout Program?
Traditionally, you can only refinance your property up to 80% of the appraised value of your home. The Spousal Buyout Program allows those separating to refinance property up to 95% of the appraised value of the matrimonial home, allowing them to utilize an additional 15% of the matrimonial homes equity.
So, what does that look like in dollars?
Let’s say your house was worth $800,000 and you could only refinance to 80% of the existing value. You would only have access to $640,000, while the Spousal Buyout Program allows you access to $760,000. That’s additional $120,000 of equity, an additional $60,000 each assuming they were dividing the equity of the home 50/50. This is a great option especially for couples who’s wealth exists within the equity of the matrimonial home.
Now, where do the three insurers come into play?
It’s important to understand that CMHC, Canada Guarantee and Genworth Canada all have very different guidelines when it comes to the Spousal Buyout Program. Most people, mortgage professionals included, do not know the differences between the guidelines when it comes to the Spousal Buyout Program.
How is each insurer different?
Let’s break it down.
How they’re the same:
All three insurers require:
- a purchase agreement (something in writing to purchase the remaining equity from your former spouse)
- an appraisal
- a signed separation agreement prior to the property transfer
Additionally, both parties must be on title of the home and candidates must qualify with a 25 year amortization and must meet the mortgage default insurance companies guidelines. No additional land transfer costs exists by doing this.
How they are different:
You can only transfer the exact loan amount plus the buyout portion to your ex. For example, a house value is $500,000 and the current mortgage is $300,000. Your ex will be provided with $125,000 in a buyout. Your existing mortgage will be $425,000 based on a home value of $500,000. ($300,000 existing mortgage, plus the $125,000 buyout to your ex = $425,000 new mortgage on your home). This example has a loan to value of 85% allowing for an additional 5% of equity usage with the Spousal Buyout Program.
No other debts are permitted to be included in the new mortgage.
Also note, that CMHC’s lending guidelines are much more restrictive today and most will not qualify unfortunately.
Allows for your existing mortgage, any joint debts (listed within the separation agreement), the buyout to your ex, and additional cash to you as long as those debts are listed within the separation agreement.
Assuming your home is worth $500,000: your existing mortgage is $300,000, your buyout to your ex is $125,000, joint debts include $25,000 and $10,000 of cash for your own personal use. ($300,000 existing mortgage, plus $125,000 buyout to your ex, plus $25,000 joint debt payout, plus $10,000 personal cash to you = $460,000.) This represents a loan to value/refinance of 92% allowing you to utilize an additional 12% of equity within your home.
Allows for your existing mortgage, any joint debts (listed within the separation agreement), and the buyout to your ex. For example, your home is worth $500,000. You have a $300,000 mortgage, the buyout to your ex is $125,000 and the joint debts equal $25,000. ($300,000 existing mortgage, plus $125,000, plus $25,000 = $450,000) this represents a loan to value/refinance of 90% allowing you to utilize as additional 10% of equity.
You can see from these scenarios why it is so important to use a mortgage broker that has access to and knowledge of all three insurers.
It is also important to know that if you previously had an insured mortgage with CMHC, Genworth Canada, or Canada Guarantee, your insurance premium could be transferred to your new mortgage which allows for additional savings. But that’s a topic for another post.