Rising interest rates and a strained affordability in the Toronto-area housing market are creating thorny issues for couples going through separation or divorce.
The turmoil that often comes with a relationship breakdown in 2023 is magnified if a couple owns property and needs to split the marital home value in a volatile real estate market.
“It creates increased conflict,” says Lisa Chegini, managing partner at the family law firm Caspersz Chegini LLP in Vaughan, Ontario. “It includes this whole unfortunate circumstance of holding each other’s money hostage in the house.”
Challenges may begin as soon as one partner decides to move out.
She says that a spouse who wants to buy a house or other housing unit may face obstacles such as low supply, high prices and strict conditions related to obtaining a mortgage.
Ms. Chegini adds that moving into a rental property can be just as difficult with low vacancy rates and high rents.
She points out that for most couples, the home is their largest asset, and the timing of the sale becomes extremely important. For example, some homeowners who bought at the peak of the market during the pandemic may not be able to sell for the same amount today.
In this case, one or both spouses may prefer to postpone the sale in the hope of obtaining a higher price at a later time.
Ms. Chegini warns that there are caveats with this approach, explaining that when both spouses have an interest in the property, the person leaving the home needs to continue paying half of the mortgage, property tax and insurance payments in order to benefit from the appreciation in value.
The non-equity spouse is not entitled to any share of the gain in the value of the home after the date of separation.
She points out that few people have enough cash to contribute to defraying costs while also paying the rent or mortgage in a new place.
Ms. Chegini sees adults moving back in with their parents or siblings as a result.
She adds that financial pressures exacerbate existing problems among many couples.
“It’s much harsher than it was in the past.”
Such scenarios also lead to an increase in the number of partners willing to buy out the other’s share of the matrimonial home – especially when the couple has children.
She says that single parents often think they will not be able to afford another home in their neighborhood and are reluctant to move children a long distance from their current school.
She points out that in family law, one partner cannot buy the other party’s rights to the home, and a judge cannot order the reluctant party to agree.
Thus, the only way to reach an agreement is for both sides to cooperate, she says. If the pair were likely to clash, she would advise them to sell instead.
In her own practice, she finds that no more than 30 or 40 percent of couples are able to reach such an agreement.
In the past, couples often estimated the value of the home and divided it between them without bringing in an appraiser.
But market values have been volatile in the past couple of years, and sometimes a partner tries to get an opportunity to increase his wealth by accelerating the sale, procrastinating or shopping around to get a valuation that suits him.
“Once they see these ratings coming, they start fighting about the numbers,” she says.
Ms Chegeni is currently working on a file where one assessment was carried out in February and another in May. Prices in the Greater Toronto Area rose by 10 per cent or more during that period.
“Now we have a battle over ratings,” she says, adding that the couple will likely take the matter to court.
But Ms Chegeni warns that such legal hassles are often not worth it because the increased legal fees will quickly erase any gains made by one party. In her experience, couples often have a hard time parting with anything more than about $25,000.
Because of the recent influx in the market, Ms. Chegeni now recommends that couples bring in an appraiser before they even begin informal negotiations about one spouse remaining in the home.
Ms. Chegini warns that a spouse who wants to keep the home may have trouble qualifying for a mortgage at current mortgage rates. I’ve heard of couples trying to find creative solutions like keeping the departing spouse on the mortgage so the lender can have two incomes.
These tactics come with all kinds of risks for the lender and the couple, she says, but the lack of housing makes it difficult for one party to keep the home.
“Chronic deficiency creates these really pressing issues.”
Mortgage broker Jason Georgopoulos of Dominion Lending Centers has also met with couples grappling with finances after a split.
In one case, one partner wants to buy out the other’s share of the home but can’t qualify for a mortgage at a reasonable rate, Mr. Georgopoulos says.
At the start of their negotiations, the couple calculated the costs assuming the mortgage rate was in the five percent range. Now the pair that wants to buy needs to qualify for an interest rate of 8 or 9 percent.
Changing circumstances, he says, prompted the couple to return to the negotiating table.
Meanwhile, the ratings were unexpected.
“Property valuations are coming all over the place – and they change almost week to week and month to month depending on what’s happening in your area.”
Mr. Georgopoulos also urges the borrower to make a realistic decision on whether the financial burden he is shouldering is feasible in the long term. He wants to make sure clients agree to a plan they can live with for five years or more.
“Just because I can get you money doesn’t mean you have to take it,” he says.
Ms. Chegini says lawyers practicing family law had hoped the turmoil would subside as couples get used to dealing with COVID-19. At the height of the pandemic, she says, many tensions arose around children and precautions such as wearing a mask and visiting family.
But high interest rates and stubborn inflation have exacerbated many conflicts, she says, and people lack a vision about the future.
“There is a feeling of losing control because there is no light at the end of the tunnel.”
In addition to the pain of a broken marriage, couples face greater financial hardship if the property has lost value since it was purchased.
“They say, ‘I thought my biggest investment would bring some kind of return — even if my relationship didn’t work out.'”