Navigating Your Way Through A Property Buy-out

A mortgage buy-out is necessary when one or more property owner/s pay out the other’s share of the property’s equity, so that the co-owner/s can be released from the mortgage and removed from the property deed.

We looked at this and more in our webinar all about navigating your way through a property buy-out.

Let’s look at some property buy-out examples

  • A relationship breakdown such as divorce/separation when one spouse desires to wholly own the marital home by buying out the departing spouse.
  • Co-ownership arrangement ending. E.g. two friends purchase a property together for qualification/affordability purposes and after a period of time the one buys the other out.
  • Parental help ending. This is similar to point 2, but instead of requiring to be bought out, the parent is removed from the deed with a buy-out procedure.
  • Investment property buyout. An owner “sells” his/her interest in a property to the other owner/s.

How buy-outs are different:

Mortgage buy-outs can usually be accomplished through two methods; either a refinance or a sale and purchase process, but each one of these methods has their limitations: 
  1. Refinances: Under current laws, refinance mortgages cannot be more than 80% of the property’s value. Thus, if the buyout requires for the mortgage to be more than 80% of the property’s value the refinance process falls short of achieving the borrowers’ goals. 
  2. Sale & Purchase Process: Although this makes more equity available for the buyout, it can also cause a lot more costs for the new past owners. 
 
Both the above methods have clear limitations and thus the mortgage rules were created to accommodate buy-outs through a hybrid of the refinance and sale/purchase methods, commonly known as “mortgage buy-outs”.  Until very recently the mortgage buy-out program was only available to legally and common-law married spouses, but the program has now been extended to all buy-outs for principal & secondary residences.   
 
Mortgage buy-outs for investment properties and borrowers who don’t qualify for prime mortgages are still subject to refinance rules. 

Principal/Secondary Residence Mortgage Buyout Program Guidelines:

Guidelines to consider for principal and secondary home, mortgage buy-outs:

  1. Mortgage Qualification: Qualification for the buyout mortgage follows normal purchase & sale requirements, rules & guidelines. E.g. For property values equal to or below $500,000, a minimum 5% equity is required. 
  2. Borrowers on Title: The remaining and departing borrowers must currently be on the property deed. 
  3. Proof of Buyout: Acceptable documentation validating the remaining borrower is purchasing the departing borrower’s interest in the property is required: 
  4. Finalized, firm agreement of purchase & sale: always required. 
  5. Finalized separation agreement: 
    • Applicable to legally or common-law married spouses. 
    • The agreement must state the full terms of the buyout, including, the amount of equity out to the departing spouse, any debts that need to be paid from the mortgage, etc. 
  1. Dissolution Agreement: 
    • Applicable to unmarried borrowers. 
    • The agreement must state the full terms of the buyout including, the amount of equity out to the departing borrower, any debts that need to be paid from the mortgage, etc. 
  1. Court Order – where applicable. 
  2. The remaining borrower must be eligible and fully qualify for the buyout mortgage.  Thus, the remaining borrower will need to supply a full set of mortgage supporting documents as required by the mortgage lender.  E.g. current mortgage statement, property tax statement, income confirmation, etc. 
  3. Mortgage buyouts are deemed to be non-arm’s length real estate transactions; thus, mortgage buyouts always require an appraisal of the property by the lender. 

It is important to note the following about appraisals:

  • The mortgage will be based on the lesser of the purchase price [the buyout property value agreed to between the remaining and departing borrowers] or the lender’s appraised value of the dwelling. 
  • The appraisal is ordered by the mortgage broker/lender/mortgage insurer from a lender approved appraiser.  The appraisal is often ordered only once the buyout mortgage application has been submitted to the mortgage lender for evaluation 
  • This means that if the existing and departing borrowers have agreed to a property value higher than its appraised value, the deficit/difference will not be covered by the buyout mortgage. 

Costs Related to Mortgage Buy-outs:

There are costs to the remaining and departing borrowers in a mortgage buyout transaction so it is important that all parties, upfront, not only understand their costs, but also determine who will be responsible for the costs.  It is essential that the borrowers consult their solicitors, accountants and any other professionals they need help from before and during the remaining borrower’s mortgage pre-qualification process. 
Although not conclusive, here is a list of expenses to consider for the mortgage buyout process: 
  • Equity payout to the departing borrower 
  • Debts that will be settled through the mortgage as defined in the separation/dissolution agreement 
  • Mortgage payout penalties 
  • Appraisal cost 
  • Condo status certificate cost 
  • Lender discharge fees 
  • Provincial & municipal land transfer taxes 
  • Mortgage closing costs 
  • PST on mortgage insurance 
  • Legal Fees & Disbursements for the existing mortgage 
  • Legal Fees & Disbursements for the buyout mortgage 

When it comes to separating from a significant other, life can get complicated. Don’t make an already difficult situation worse by not taking the right steps. If you need help with a property buy-out, chat to us. We’re here for you.