Higher interest rates and strained affordability in the Toronto-area housing market are creating thorny issues for married couples going through separation or divorce.
The turbulence that often comes with relationship breakdown is magnified in 2023 if the couple owns property and needs to divide the value of the matrimonial home in a volatile real estate market.
“This is creating increased conflict,” says Lisa Chegini, managing partner at the family law firm Caspersz Chegini LLP in Vaughan, Ont., “It includes this whole unfortunate circumstance of each party’s money being held hostage in the home.”
The challenges may begin as soon as one partner decides to move out.
A spouse who wants to buy another house or condo unit may come up against the obstacles of low supply, high prices and stringent conditions around getting a mortgage, she says.
And moving into a rental property can be just as difficult with low vacancy rates and soaring rents, Ms. Chegini adds.
For most couples, the home is their biggest asset, she points out, and the timing of a sale becomes all-important. Some homeowners who purchased at the height of the market during the pandemic, for example, may not be able to sell for the same amount today.
In that case, one or both spouses might favour putting off a sale with the hope of fetching a higher price later.
There are caveats with that approach, warns Ms. Chegini, explaining that, when both spouses are on title, the one who moves out needs to keep paying half of the mortgage, property tax and insurance payments in order to benefit from a rise in value.
A spouse who is not on title is not entitled to any share of the gain in the value of the house after the date of separation.
Few people have enough cash to contribute to those carrying costs while they are also paying for rent or the mortgage on a new place, she points out.
Ms. Chegini is seeing adults move back in with their parents or siblings as a result.
The financial strain is exacerbating existing problems between many couples, she adds.
“It is more acrimonious than in the past.”
Such scenarios are also leading to an increase in the number of partners wanting to purchase the other’s share of the matrimonial home – especially when the couple has children.
Single parents often figure they won’t be able to afford another house in their neighbourhood, she says, and they’re reluctant to move the kids a long distance from their current school.
In family law, one partner does not have the right to buy out the other’s equity in the home, she points out, and a judge can’t order a reluctant party to agree.
Therefore, the only way to come to an agreement is for the two to co-operate, she says. If the couple is likely to clash, she advises them to sell instead.
In her own practice, she figures no more than 30 or 40 per cent of couples are able to reach such a deal.
In the past, couples would often estimate the value of the home and divide it up between them without bringing in an appraiser.
But market values have been fluctuating in the past couple of years, and sometimes one partner will try to gain an opportunity to increase their own wealth by speeding up a sale, stalling or shopping around for the appraisal that suits them.
“Once they see these appraisals coming in, they start fighting over the numbers,” she says.
Ms. Chegini is currently working on a file with one appraisal done in February and another in May. Prices in the Greater Toronto Area shot up 10 per cent or more during that time.
“Now we have a battle of the appraisals,” she says, adding that the spouses will likely take the matter to court.
But Ms. Chegini cautions that such legal wrangling is often not worthwhile because mounting legal fees will quickly erase any gain that one side makes. In her experience, couples often have trouble letting go of any amount above about $25,000.
Because of the recent flux in the market, Ms. Chegini now recommends that couples bring in an appraiser before they start even an informal negotiation around one spouse staying in the home.
The spouse who wants to keep the house may have trouble qualifying for a mortgage at current mortgage rates, Ms. Chegini warns. She has heard of couples trying to find creative solutions such as having the departing spouse remain on the mortgage so that the lender will see two incomes.
Those tactics involve all kinds of risk for the lender and the couple, she says, but the lack of housing is making it harder for one party to hold onto a house.
“The chronic shortage is really creating these pressing issues.”
Mortgage broker Jason Georgopoulos of Dominion Lending Centres, has also been meeting with couples who grapple with financing after a split.
In one case, a partner wants to buy the other’s share of the house but can’t qualify for a mortgage at a rate that makes sense, says Mr. Georgopoulos.
At the start of their negotiations, the couple calculated costs assuming a mortgage rate in the five per cent range. Now the spouse who wants to purchase needs to qualify at an interest rate of 8 or 9 per cent.
The changing circumstances have caused the couple to go back to the bargaining table, he says. Appraisals, meanwhile, have been unpredictable.
“The valuations of properties are coming in all over the place – it almost changes week-to-week and month-to-month depending on what’s happening in your neighbourhood.”
Mr. Georgopoulos also urges the borrower to make a realistic decision about whether the financial burden they are taking on is feasible for the long term. He wants to ensure that clients are agreeing to a plan they can live with for five years or more.
“Just because I can get you the money doesn’t mean you should take it,” he says.
Ms. Chegini says lawyers who practice family law were hoping that turmoil would settle down as couples became accustomed to dealing with COVID-19. At the peak of the pandemic, many tensions arose around children and precautions such as masking and visiting family, she says.
But climbing interest rates and stubborn inflation have exacerbated many conflicts, she says, and people lack visibility about the future.
“There’s that feeling of loss of control because there’s no light at the end of the tunnel.”
In addition to the pain of marriage breakdown, couples are grappling with greater financial hardship if the property has lost value since they purchased it.
“They say, ‘I thought my biggest investment would have some kind of return – even if my relationship didn’t work out.’”