What Do the New Mortgage Rules Mean for Spousal Buyouts?

2 October 2024 By: Sunlite Mortgage0 comments

The recent changes to Canada’s mortgage rules, announced in September 2024, have introduced significant advantages for Canadians, especially those going through a spousal buyout. Before these changes, homeowners in high-priced markets faced steep financial barriers when attempting to retain the family home post-separation. If the home’s value exceeded $1 million, buyers would be required to make a 20% down payment to refinance and buy out their spouse’s share of the property.

However, the federal government has now increased the insured mortgage cap from $1 million to $1.5 million, allowing homeowners in this range to qualify for high-ratio mortgage insurance with lower down payment requirements. This reform benefits those in hot housing markets like Toronto or Vancouver, where home values have risen dramatically in recent years.

Example: Otto’s Spousal Buyout

Let’s take a closer look at how these new rules apply to real-life scenarios.

Otto has been married for fifteen years. During that time, he and his spouse purchased a home for $600,000. Over time, the home’s value has appreciated, and it is now worth $1.4 million. Unfortunately, Otto and his spouse are going through a separation, and Otto wishes to keep the home. Under the terms of their separation agreement, a legal document that outlines the rights and responsibilities of each spouse during the separation, he needs to buy out his spouse’s share of the property.

Under the old mortgage rules, since the home is worth more than $1 million, Otto would have been required to make a 20% down payment to refinance the mortgage. For a home valued at $1.4 million, Otto would need to come up with $280,000 just for the down payment. This large sum could be difficult for many people, especially those navigating the financial complexities of a separation.

However, the new mortgage rules allow Otto to qualify for an insured mortgage with a much lower down payment. Here’s how the new formula works:

• 5% down payment on the first $500,000 of the home’s value = $25,000.
• 10% down payment on the remaining $900,000 = $90,000.

The new mortgage rules bring Otto’s total required down payment to $115,000, a significant reduction from the $280,000 required under the old rules. These changes make it far more manageable for Otto to retain the family home without needing to provide such a substantial lump sum upfront.

How the New Mortgage Rules Benefit Spousal Buyouts

The updated mortgage rules offer several key advantages to homeowners going through a spousal buyout, particularly in high-value markets:

1. Lower Financial Barriers: The increased insured mortgage cap makes it easier for individuals to buy out their spouse’s share of the home without needing to provide the 20% down payment previously required for properties over $1 million. This change can provide much-needed financial relief during an already stressful time.
2. Access to High-Ratio Mortgages: By qualifying for a high-ratio mortgage, homeowners like Otto can benefit from longer amortization periods and lower monthly payments, which are important for anyone trying to manage finances post-separation. This makes homeownership more sustainable in the long term, allowing them to stay in the family home.
3. Retaining Stability: For many, keeping the family home offers stability and continuity during a major life transition. With the new rules, separating couples can make more informed decisions about whether they can afford to stay in their home, avoiding the need to sell the property and move.
4. Better Market Access: The increase in the insured mortgage cap to $1.5 million reflects the realities of today’s housing market. Home prices have surpassed the old $1 million threshold in many urban centers, making it difficult for homeowners to access financing under previous rules. The updated cap provides more flexibility for buyers and sellers in these markets.

Considerations for Those Going Through a Spousal Buyout

While the new mortgage rules provide clear benefits, there are still important factors to consider when deciding whether to proceed with a spousal buyout:

1. Financial Eligibility: Homeowners still need to meet mortgage lender criteria for income, debt servicing, and creditworthiness. While the new rules lower the down payment requirements, lenders will still evaluate whether the buying spouse can afford the new mortgage on their own.
2. Refinancing Costs: Refinancing a mortgage involves additional costs, such as legal fees, appraisal fees, and potentially a penalty for breaking the existing mortgage. Homeowners should factor these costs into their decision-making process.
3. Long-Term Financial Planning: While keeping the family home can provide emotional stability, it’s essential to consider the long-term financial impact of taking on the mortgage alone. Homeowners should consult a mortgage broker to ensure they can afford the ongoing mortgage costs, property taxes, maintenance, and insurance.

Encouragement for Homeowners Facing a Spousal Buyout

Suppose you’re going through a separation or divorce and are considering a spousal buyout. In that case, these new mortgage rules offer a brighter path forward. By reducing the required down payment and increasing access to insured mortgages for homes valued up to $1.5 million, the government has made it easier for individuals to retain their house during a challenging time.

Whether you’re looking to buy out your spouse’s share of the home or you’re navigating the emotional and financial complexities of a separation, the new rules can provide much-needed flexibility. It’s important to consult with a mortgage broker or financial advisor to fully understand your options and ensure that you make the best decision for your financial future.

These changes are designed to help Canadians—whether first-time homebuyers or those undergoing a spousal buyout—achieve homeownership and maintain stability during life’s transitions by expanding access to insured mortgages and lowering financial barriers.

Next Steps: How to Take Advantage of the New Mortgage Rules

If you’re in the process of a spousal buyout or considering one shortly, now is the time to explore how the new mortgage rules can benefit you. Here’s what you can do:

• Contact a Mortgage Broker: Get expert advice on how these new rules apply to your situation, and explore the best options for refinancing your mortgage.
• Assess Your Financial Situation: Review your current financial standing and ensure you qualify for the new mortgage based on your income, credit score, and debt levels.
• Plan for the Future: Consider your long-term financial goals and decide whether staying in your current home is right for you and your family.

By taking proactive steps and understanding how the new rules work, you can confidently navigate the spousal buyout process and retain the stability of homeownership. Talk to a Sunlite Mortgage agent if you need advice that is specific to you.