Real estate, divorce make a toxic mix – The Globe and Mail

When a couple who own a home together get divorced the first instinct for many is for at least one party to keep it. But as housing prices have soared to new highs in the past few years it’s become increasingly difficult, if not impossible, for most couples to carry out any kind of buyout.

Jim Murray discovered this in 2021 when he and his ex-wife were preparing to separate. “It was one of the first things we discussed. I wanted to keep the house. I thought it was a good investment,” he said, of their Scarborough Bluffs home. “We were sitting on a lot of money; it had gone up a lot in value. At the end of the day, I couldn’t do it financially.”

Indeed, the home ended up selling for more than $2.2-million, which was a million more than the couple had paid when they bought it in 2015. In order for Mr. Murray – who works in the film and television industry – to have bought out his partner, he would have had to compensate for her share of the equity (perhaps as much as $500,000) and then find financing to carry that, plus the original debt, which was near impossible on one salary. “I do well, but I didn’t have close to enough money,” he said.

According to those who work closely with divorce and real estate, the numbers simply don’t add up in most cases.

“You go back four, five years, it wasn’t easy, people had to get some parental help,” said Ron Butler of Butler Mortgage. “Now, you better have the Westons as your parents.“

“We used to be able to do it 50 per cent of the time. We could refinance and keep the house. We’d do like 12 or 20 a year; now we’re down to one a year, and you better be a thoracic surgeon or a Bay Street lawyer.”

Mr. Butler said a key driver has been the growing disconnect between income and house prices, particularly in the Toronto-area and Lower Mainland of British Columbia. “The greatest surge in income detachment has been the last 24 months … in the really crazily affected outskirts – Durham and Ajax in the GTA – it’s more than doubled,” Mr. Butler said.

And many middle-class homeowners are finding they need to try novel and sometimes difficult new living arrangements if they hope to keep children in a matrimonial home.

“I’ve got clients that have parted ways, and for years continue to live in their original family home. They cannot afford to get away from each other. It’s ‘I’ll live on one floor you live on one floor,’” said Kurt Rosentreter, a CPA and senior financial advisor with Manulife Securities Inc. A good rule of thumb is, if it’s difficult for a couple to afford one home, it’s going to be harder to own two.

Mr. Rosentreter said there can be tricky decisions – some with tax implications – when it comes to dividing assets if returning to real estate ownership is part of the goal. For instance, maybe one partner offers to give up more shared RRSPs, but those assets cannot be used for a down payment. Perhaps one partner’s primary income is going to be spousal or parental support. Some banks won’t accept that as qualifying income, or if they do, if those payment arrangements have a time limit shorter than, say, a 25-year mortgage, lenders won’t close a deal. “It’s been around for 10 years like this, but it clearly gets worse as prices continue to rise. People can end up renting for life because it just doesn’t play out,” he said.

Jen Tripp, a Toronto-area sales representative with HomeLife/Realty One Ltd., does a lot of work with divorced or soon to be divorced clients and has seen up close the difficulties they can have. “I am often called in before a spouse knows they are about to get a divorce,” to help provide an assessment of a marital home’s value she said. “You don’t want to say, ‘I want a divorce’ and not be able to afford it.”

One thing Ms. Tripp sees is clients working with banks that won’t approve a mortgage until a separation agreement is finalized, a process that’s anything but easy in many cases. “You can’t move on: I’ve seen it take three years, sometimes it’s six months. But it takes a lot of work to get to a separation agreement – and a lot of money,” she said.

The speed of the market’s rise has also impacted the way those agreements are calculated. “The housing situation in Toronto has gotten so crazy – the value of the house changes so quickly. You can talk about a house valued at $1.5-millon and six months later it’s $1.75-million,” said Cori Kalinowski, a lawyer in family law since 1993 and who has specialized mediation (an alternative to courtroom litigation) since 2004. A few hundred thousand extra dollars in real estate equity can unbalance a carefully crafted settlement agreement in a snap. “You’re constantly having to assess value,” she said.

Ms. Kalinowski is seeing many more clients than she used to. Statistics Canada reported 2020 was a record-low year for divorces (in part due to a 6-month period when many family courts weren’t processing divorces), but according to Ms. Kalinowski her practice and others like it more than made up for lost time in 2021.

“It’s been extremely busy. I saw a lot of separations and surprising amount of co-habitation agreements,” she said. “We had them coming in, bing-bang-bong, in these big waves.”

But it’s not all doom and gloom for divorced folks looking to get back in the market. John Panagakos, a mortgage agent for Safebridge Financial Group runs a specialty separation financing practice where about 90 per cent of his mortgages are for people in that situation. He says if you know where to look, there are lending products that will fit most circumstances.

“There are mortgages where if you’ve got 50-per-cent equity in your property you can get a mortgage without a mortgage payment,” he said, in an arrangement that offers a percentage of the home’s value to the lender in the event of a sale or transfer. “Some banks allow for 100 per cent of child and support payments to be recognized as dollar for dollar income, some need a 3- to 6-month history of payments [before qualification] whereas certain banks don’t want to play with you at all.”

Even if you fail a mortgage stress test, there are some credit unions exempt from applying that test. According to him, buyouts are still possible in the right conditions. “I’m not saying it’s not difficult … there’s definitely a trend, it’s getting harder. That’s not to say it’s impossible,” Mr. Panagakos said.

Mr. Murray ran into several of those issues when he sought to buy a home in Rouge Valley for a little over $1-million and his mortgage application was initially declined by his bank. He looked at family-sized rentals, but the space he needed with four children was running between $3,000-$5,000 a month. To make the numbers work he paid his ex-wife a lump-sum of her spousal support up front (banks consider spousal support agreements a debt to be paid). “That’s money [from the sale of the house] that evaporated,” he said, and it still wasn’t enough for the bank. “They were asking me to come to the table with close to 80-per-cent down. I got some help from parents. At 50 years old I had to say: ‘Can you please help me with this?’ Thankfully they were in a position to do that.”

It was a difficult, emotional, stressful time to be making financial decisions that might shape the rest of his family’s life. But in the end, he and his former spouse both ended up with their own houses, even if they aren’t in their old neighbourhood. “I’m farther out than I ever imagined I would be, but I also wanted a house with a backyard,” Mr. Murray said. “I feel very lucky for where I landed, but I also feel unhappy about it. It was hard a decision driven by necessity.”

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