Quick Answer
Refinancing can be part of a separation or divorce when one person wants to keep the family home and needs to remove the other person from the mortgage and title, or when equity in the home needs to be used to complete a property settlement. The person keeping the home will usually need to qualify for the new mortgage on their own income, debts, credit, and support obligations. In Alberta, the legal division of the property and the mortgage financing are separate pieces that often need to be coordinated with both a family lawyer and a mortgage professional.
Why Would a Separating Couple Refinance?
When a couple separates, the home is often one of the largest financial assets to deal with.
A refinance may be considered when one spouse wants to stay in the home instead of selling it.
That can happen for several reasons:
- One parent wants to keep the children in the same home or school area
- One person has a stronger attachment to the property
- Selling immediately is not ideal
- The couple agrees that one person will buy out the other person’s share
- Equity from the home is needed to complete part of the property settlement
In practical terms, refinancing can allow the existing mortgage to be replaced with a new mortgage in the name of the person who will remain responsible for the property.
What Does a Spousal Buyout Look Like?
A common scenario looks something like this:
The home has an agreed or appraised value. The outstanding mortgage and other secured debts are considered, which helps establish the available equity.
The separating couple then determines how that equity will be divided as part of their legal property settlement.
If one person is keeping the home, they may need a larger mortgage to:
- Pay off the existing mortgage
- Provide the agreed amount of equity to the departing spouse
- Leave the remaining spouse as the borrower responsible for the new mortgage
The exact numbers depend on the legal agreement, the home’s value, the mortgage balance, and the financing that the remaining borrower can qualify for.
Does the Person Keeping the Home Have to Qualify Again?
Usually, yes.
A separation does not automatically allow one borrower to simply remove the other person from an existing mortgage.
The person keeping the home generally has to qualify for the new mortgage based on their own financial position.
Lenders may consider:
- Income
- Credit history
- Existing debts
- Property taxes
- Heating costs
- Condo fees, if applicable
- Child support
- Spousal support
- The amount being borrowed
For federally regulated lenders, refinancing generally requires the borrower to pass the mortgage stress test. Banks use the higher of 5.25% or the contract rate plus 2% when assessing qualification.
This is one reason it can be helpful to speak with a mortgage broker early in the separation process. Knowing what one person can realistically qualify for may affect the discussions around keeping or selling the home.
How Does Home Equity Factor Into the Refinance?
Home equity is generally the value of the property minus the mortgage and other debt secured against it.
For example, if a property is worth $500,000 and there is $300,000 owing on the mortgage, there is approximately $200,000 in gross equity before considering legal costs, penalties, fees, or the terms of the property settlement.
Under standard refinancing rules, lenders will generally not lend beyond certain loan to value limits. The Financial Consumer Agency of Canada notes that borrowing secured against home equity is typically limited to a maximum of 80% of the home’s value.
That means there may not always be enough borrowing room to complete the desired buyout, even when there is significant equity on paper.
What If the Current Mortgage Is Still in the Middle of Its Term?
This is another important consideration.
Replacing the existing mortgage before the end of its term can trigger a prepayment penalty, particularly with a closed mortgage. There may also be appraisal, legal, discharge, and registration costs associated with setting up the new financing.
A mortgage broker can help compare options such as:
- Refinancing with the existing lender
- Moving the mortgage to another lender
- Waiting until renewal if timing allows
- Reviewing whether the existing mortgage has assumptions or other features that may help
The lowest interest rate is not always the only consideration during a divorce refinance. Penalties and qualification requirements can materially affect the final numbers.
What Happens to the Title of the Property?
The mortgage and the legal ownership of the home are related, but they are not the same thing.
If one spouse is keeping the property, the departing spouse may also need to be removed from title as part of the legal transaction.
That usually requires legal documentation and registration through a lawyer.
In Alberta, property division for married spouses and qualifying adult interdependent partners is governed by provincial family property legislation, while divorce itself is governed federally under the Divorce Act. Alberta specifically recommends obtaining legal advice because family property matters can be complex.
A mortgage broker can help arrange the financing, but should not determine how the equity should legally be divided.
Do Child Support and Spousal Support Affect Mortgage Qualification?
They can.
Support payments may be included when a lender looks at a borrower’s total financial obligations. The Financial Consumer Agency of Canada specifically identifies child and spousal support as debts that can form part of a borrower’s total debt load when qualifying for a mortgage.
Depending on the situation and lender guidelines, support income may also be considered when assessing qualification if it can be properly documented.
This is another reason the final separation agreement can be important when arranging financing.
What If Neither Person Can Afford the Home Alone?
Sometimes the numbers simply do not work.
If neither spouse can qualify to carry the property individually, selling the home may be the most practical option.
Other possibilities may exist depending on the mortgage, timing, legal agreement, and financial circumstances, but it is important to know the financing limits before making commitments in a separation agreement.
Why Speak With a Mortgage Broker Early?
Separation can create a lot of financial uncertainty, and the mortgage is often one of the largest pieces of the puzzle.
A mortgage broker can help answer questions such as:
- Can I qualify to keep the home on my own?
- How much equity could potentially be accessed?
- What might the new mortgage payment look like?
- Will a mortgage penalty apply?
- How do support payments affect qualification?
- Would refinancing now or waiting until renewal make more sense?
Having those numbers early can make conversations with your lawyer and former partner much more informed.
Refinancing After Divorce in Lethbridge
If you are separating or divorcing and one person hopes to keep the family home, refinancing may provide a path forward.
Every situation is different, so the financing should be coordinated carefully with the legal property settlement.
A Lethbridge mortgage broker can review your income, existing mortgage, available equity, support obligations, and lender options to help you understand what may be possible before you make a final decision about the home.
