Interest rate jump makes securing financing to purchase interest difficult: family law lawyer
As the real estate market is cooling and interest rates are increasing, family law lawyer Kevin Caspersz at Shulman & Partners LLP says divorcing couples are facing new challenges. Caspersz says a marriage contract makes navigating the complexities of a jointly held property easier and that the best time to prepare a contract is when the relationship is on good terms.
“Real estate transactions involving a family home can be emotional in nature, and when you add the potential conflict that arises with divorce, it can cause havoc during an already difficult time,” Caspersz says.
He says partners do not enjoy preparing a marriage contract when the relationship is good, but doing so will minimize conflict about jointly held properties or further expenses, should the parties ultimately separate.
“You may never rely on that marriage contract, you may never get separated, and that’s wonderful, but if you do, at least you have something outlining how you’re going to deal with this property. That will be a conversation you don’t have to argue about when separating, except to follow what you’ve agreed to in the marriage contract.”
Caspersz says increasing interest rates have made it difficult for parties to secure the financing to buy out the other person’s interest.
“In the past, we would often see one spouse buy out the other spouse’s equity in the home, mostly for the sake of continuity and stability for the children. This has been much harder recently, and it will continue to be out-of-reach for most of my clients – especially as they deal with rising inflation, rising interest rates, and potentially earning less money.”
Caspersz says statistics released by the Canadian Real Estate Association (CREA) show national home sales were down by 12.6 percent monthly, with the greater Toronto area recording an 80 percent drop. Realtors on Twitter also reported a 20 percent drop in home prices in some GTA markets.
Home sales recorded over multiple listing services (MLS) dropped 12.5 percent between March and April 2022, which is the lowest since the 2020 summer, Caspersz says.
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While home values have decreased somewhat, inflation and interest rates have increased significantly. These market conditions make it difficult for parties to secure financing from a financial institution where they are not the primary income earner or rely on support to complete their financial independence.
Caspersz says divorcing couples who intend to buy out their ex-partner must understand an asset’s value to determine the equity interest before speaking to financial institutions for financing pre-approval. However, if they cannot secure or sustain financing for the monthly mortgage, they can’t resolve the issue of a jointly held property with a payout.
He says the path of least resistance is simply listing the property, selling it, and dividing the net proceeds. “If you dispose of the property and net proceeds of the sale are divided between the parties, they have their share and can figure out what to do with it and how to arrange their respective household.”
The other party might also be against selling their equity interest to their ex-partner because putting the property on the market could yield a better return, Caspersz says.
“There will be a bidding war, especially if the asset is in a good neighbourhood and there are not many buying options in that area.”
Executing a marriage contract will require each party to have their counsel, but he says it does not have to be adversarial or confrontational. For example, a party can lay out the terms with their counsel, and the other person can seek independent legal advice from their lawyer to ensure that the contract is fair and equitable or deal with the elements that are not. In addition, the agreement must have all the requirements to ensure it is upheld and viable.