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When going through a divorce, deciding what happens to the family home and the mortgage can become complicated. In this article, we review your options.
My situation is this: My sister has accumulated a huge mortgage with her husband. Her husband has since left her and will walk away from the house as part of their separation agreement. Once his name is off the title of the house, my sister will not be able to make the payments, nor be approved for the mortgage herself. She is refusing to sell her house. She has asked my elderly father to be her co-signer. I think he will feel obligated to agree. If my sister cannot afford the payments once he has co-signed, will my father have to make the payments? Also, when my father passes away, will my sister’s entire mortgage (now half his) automatically come out of his estate? My father would have enough money in his estate to pay the entire mortgage. Or will my sister just need to find another co-signer?
—Filipa
Thank you for your questions, Filipa. Yes, father co-signs the mortgage and your if your sister cannot afford the payments, your father will have to make the payments. Otherwise, the mortgage goes into default. But, there’s more to it than that.
We’ll walk you through what happens to your mortgage when you go through a divorce. Then we’ll explore what it means to co-sign a mortgage, including the responsibilities and risks of the co-signer, and alternative solutions for your sister.
Going through a divorce is never fun or easy, and the stress can be felt by family members, too. Once a couple decides it’s time to part ways and divorce, this is when they start dividing up their assets. Typically, anything jointly held is divided. This includes joint chequing and savings accounts, jointly held debts and, most importantly, the family home—that is perhaps the most complicated of all. For most Canadians, their residence is their single most valuable asset.
Divorcing spouses who have a mortgage on their home have two main choices:
If the proceeds of the sale aren’t high enough to pay off the mortgage, both spouses still owe money to the lender.
If one of the spouses decides to keep the family home, whoever is keeping it will need to buy out the former partner’s share.
There are two main ways to do this.
When one of the partners assumes the mortgage, they become solely responsible for the mortgage payments. If your sister decides to go this route, she’ll need to complete the necessary paperwork (release of covenant, change of ownership, etc.) confirming that you’re assuming the mortgage and that her spouse is being released from any further liability. If either decides to assume the mortgage, they’ll need to be able to afford to pay out their ex-spouse’s share outside of the mortgage. Most people can’t afford to do that unless they were the major breadwinner of the couple. The next option is a lot more popular in Canada.
Refinancing the mortgage is ideal for someone who is looking to keep the family home but isn’t able to, or doesn’t want to, assume the existing mortgage. When refinancing a mortgage, the ex-spouse’s share of the home will still be bought out, but the remaining home owner has more flexibility. For example, the amortization period of the new mortgage can be extended to make the payments more affordable.
When a mortgage is refinanced, a new, bigger mortgage is used to pay off the existing mortgage, plus the buyout amount owed to the ex-spouse. Like assuming the mortgage, one must be able to qualify for the mortgage on their own. If someone can’t qualify, that’s when they might consider the next option: having someone co-sign on your mortgage.
The terms “co-signer,” “guarantor” and “joint mortgage” are often used interchangeably. Although these terms share some similarities, there are some key differences to be aware of.
A co-signer is someone added to both the mortgage and the title of your property. As such, the lender is provided with more reassurance that the mortgage will be paid as agreed upon.
A guarantor is added to the mortgage, but not the title of the property. The guarantor is responsible for the mortgage payments being paid on time but isn’t an “owner” of the property.
A joint mortgage is when a property is mortgaged by two or more people. As with co-signing, any agreeing parties to the joint mortgage are responsible for the mortgage loan.
Before your father co-signs on your sister’s mortgage, Filipa, it’s important that he be fully aware of, and understand, both his responsibilities and risks as a co-signer.
If your father agrees to co-sign on your sister’s mortgage, both your sister and father would own the property. With ownership comes risk, which we’ll cover below.
The ownership of the property doesn’t have to be equally divided, though. Instead of 50%/50% ownership, your sister and father could agree to 70%/30%, 60%/40% or even 99%/1%. However, owning less than half the property doesn’t relieve your father of the risks of being a co-signer.
Both parties are responsible for the mortgage. As co-signers, both your sister and father would be equally responsible for the mortgage payments, Filipa. If your sister were unable to make the mortgage payments, the mortgage lender would expect your father to make them himself.
Becoming a co-signer of a mortgage does come with detriments. If your sister is late on a payment, it would negatively affect your father’s credit score. It will show as a missed payment for him, even though he didn’t take out the mortgage himself. This happens because he’s a co-signer.
Also, Filipa, if your father wants to buy other properties, the mortgage payments for the co-signed property will count fully towards his mortgage debt ratios (which are used to assess the risk of not being able to pay for another loan). This could mean that he won’t be able to afford to take out a mortgage even if he otherwise might qualify.
What are other issues that could arise from co-signing? The co-signer would be assuming all the risks that come with owning a property. This could negatively affect your father’s finances, Filipa. For example, the price of the home could decline. If the home needs significant maintenance that your sister can’t afford, your father may need to help cover the cost.
Also, Filipa, when your father eventually passes away, if the ownership is joint tenancy (when two or more people own a property together, each with equal obligations and rights), your sister’s entire mortgage (now half his) will not automatically come out of his estate. This is the case even if your father has enough money to pay the entire mortgage. The liability for the mortgage will transfer to your sister, and she will be in the same situation she finds herself in now. She must be able to qualify for the mortgage on her own or she will need to find a new co-signer.
Divorce itself can be one of the most significant financial events someone may experience, especially when the courts are involved. I imagine your sister, Filipa, may have financial obligations outside of the mortgage and may feel overwhelmed.
Rather than stretching herself to the max and potentially risking your father’s financial well-being, your sister might consider selling the family home. I know it’s a tough pill to swallow. By doing this, though, she could afford to move into something more affordable and not find herself, as they say, “house rich, cash poor.”
With inflation near a 40-year high, living within our means is important these days. By buying a more modest house and taking on a lower mortgage, your sister will be able to move forward into her new life with reduced debt and the ability to live within her means.
If you need support managing your debts after divorce, Credit Canada’s certified non-profit credit counsellors have decades of combined experience supporting Canadians with debt in almost every situation. For anyone facing financial insecurity and overwhelming debt during or after divorce, there are options.
We can walk you through some strategies to mitigate your debt. Contact one of our certified non-profit credit counsellors today. It’s confidential, non-judgmental and 100% free.
Credit Canada is a non-profit credit counselling agency that has been helping Canadians get out of debt and back into life for over 50 years. Our counselling is confidential, non-judgmental and 100% free.
This article was created by a MoneySense content partner, based on its expertise on this topic. This is not advertising nor an advertorial.
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