Experiencing a separation is never easy, and it comes with a good dose of uncertainty, especially financial. Buying out your ex-spouse’s share to become the sole owner of your home can quickly become a headache in today’s market. But by defining your needs and seeking out the right information, you put all the chances on your side to make the best decision.
The situation
Thierry*, 54, separates from his partner. They have a house together worth $470,000 with a mortgage of $38,000. They each pay 50% of all expenses related to their property.
“We continue to live together while she finds a new place and my intention is to buy her back her share, then rent a room for around $700 per month to make ends meet,” says Thierry.
If he is worried about his lifestyle, it is because the value of his mortgage will increase considerably. He will give $216,000 to his former partner ($470,000 less the $38,000 mortgage divided in two). He will then add to this amount the $38,000 current mortgage loan and subtract $30,000 which he will take into his savings account. So, he will have to get a mortgage loan of $224,000.
Thierry plans to take an amortization period of 20 years and make accelerated payments every two weeks. But he wonders if it wouldn’t be better to take 25 years to reduce his financial stress. Especially since at age 60, he would like to work three or four days a week, or take advantage of the deferred salary to travel two or three months a year. He plans to retire at 65.
Thierry is also wondering about the term of his loan.
“As the end of our mortgage contract is fast approaching, but it is possible that rates will drop in the coming months, I wonder if I should take out a three-year fixed mortgage,” says Thierry.
Finally, he who is currently doing business with a traditional bank is wondering about the advantages of going to a virtual bank.
Numbers
Annual income: $85,000
Value of the house: $470,000
Mortgage: $38,000, maturing at the end of March
Debt: $0
Vehicle: paid for, but will purchase one within three years worth $10,000
Credit score: over 800
Savings account: $60,000
Registered retirement savings plan (RRSP): $125,000
Tax-Free Savings Account (TFSA): $70,000
Non-registered guaranteed investment certificates (GICs): $55,000
Evaluate the offer from your current lender
PHOTO FROM SANDRA ALLARD’S LINKEDIN ACCOUNT
Sandra Allard, mortgage broker at Planiprêt
While many people are asking questions about renewing their mortgage loan in the current context where everything is changing very quickly, Sandra Allard, mortgage broker at Planiprêt, insists on the importance of being well informed and seeking advice. personalized advice from a professional to make an informed decision.
For example, in Thierry’s case, she believes that the first step is to ask his current lender what he can offer him. “Then, he will be able to look at the other options on the market from traditional and virtual banks, then go for the best offer according to his needs,” she explains. Moreover, several lenders pay the assessment of the property. »
Opt for a rather short term
The mortgage broker assesses that Thierry has a good instinct in wanting to avoid signing now for a fixed five-year term. “I would recommend that he not opt for a term of more than about three years,” she says.
Yes, because the rates are very changeable, but also because Thierry is in a period of transition.
“We don’t know if he will meet someone more quickly than expected and if he will still want to keep his house,” explains Sandra Allard. Then, when he turns 57, it will be time to put a financial strategy in place for his future needs as he nears retirement and soon begins working less. »
Use your savings to reduce your loan
The mortgage broker also completely agrees with Thierry’s idea of taking $30,000 from his savings account to reduce his mortgage loan.
“Interest rates are high right now and what he has in his savings account is not making a profit, so it’s better to get out,” she assesses. In addition, Thierry is nervous about obtaining such a large loan as he approaches retirement. »
She adds that he could even withdraw almost everything from his savings account, because he has other savings, notably in his TFSA. “But I feel like it reassures him to have so much money in his savings account and that feeling of security is important, so it’s okay for him to hold off on it. »
Opt for a 25-year amortization
Sandra Allard also encourages Thierry to opt for a 25-year amortization instead of 20 to reduce his financial stress. “He must give himself as much latitude as possible,” she says. He could still make his payments accelerated as if he had a 20-year term. But, in the event of a problem, it could revert to its initial payment based on a 25-year amortization. »
Finally, she wants to reassure him about his borrowing capacity. “Going from a mortgage of $38,000 to $224,000 is major,” she says. But based on his financial situation, he can afford it. It’s good to be careful though, because something can always happen and we see a lot of people borrowing too much and then getting mired in debt. Thierry should still consult a mortgage broker who will study his profile and his needs in more depth in order to give him personalized advice. »
* Although the case highlighted in this section is real, the first name used is fictitious.