If you follow local media coverage, you will know that changes in the real estate market in the Lower Mainland of B.C., and Vancouver in particular, are having far reaching effects. These effects ripple down to family law cases too. In many situations where people are separating or divorcing and also have to deal with shared real property, the changes in market value of their home, or the new mortgage qualification rules, are making the settlement of property issues more challenging than they may have been in previous years.
Declining property values
The first notable change is the general decline in real property, or house values. While some housing products have had a lesser decline in value, such as condos or town homes in suburban neighbourhoods, some former matrimonial homes have had major declines in value from the market highs of 2017. If you are to believe some media reports, property values are down 20-25% from market highs in some parts of the west side of Vancouver, and pockets of North Vancouver and West Vancouver.
Couples that were once fortunate to own high market valued properties may have been counting on the accelerated paper value of their properties when the market seemed to have no limits. They are now dealing with the reality of having to sell a property due to their divorce, which may now be of a much lower value than they had once hoped for.
New mortgage qualification rules
The second economic effect that family law professionals have to address now, when it comes to dividing up real property assets, is the inability for one spouse to buy-out the other spouse’s interest in the property due to the new mortgage qualification rules.
In the past, when couples figured out that one party buying out the other from their equity in the family home was a reasonable arrangement, it was easier for a spouse to qualify for the re-financing to do so. Since new mortgage qualification rules came into effect in early 2018 (AKA the ‘mortgage stress-test’), it is much more difficult for a spouse to obtain the pre-qualifications needed to be able to buy-out their former spouse’s equity in the family home.
The new mortgage qualification rules look at one’s sources of income with much more scrutiny, count the value of a rental unit differently, and even look at how receipt or payment of spousal or child support should be counted when qualifying for re-financing.
From owner to renter
These two major economic changes limit the options available to separating spouses, and require them to think outside the box when it comes to dealing with their home property.
Limitations could mean that a couple is forced into selling a property at the new market lows because one spouse simply cannot qualify to buy-out the other. This situation may result in both parties getting far less equity out of their real estate investment than they once thought, which they may have been planning to put into a down-sized real estate purchase.
They may both end up going from property owners, to both becoming property renters, an option that may have not been on their radar 2 or 3 years ago when housing values were at their peak.
Delaying the sale
Family dispute resolution professionals now see more and more couples who have decided that despite their divorce, now is not the time to sell their property at a discount, and so choose to remain as ‘co-owners’ of the property post-separation and address the sale of that property at a future date.
In this scenario, it is important that the couple work with their family lawyers to carefully craft the parameters for sharing their new co- ownership, addressing such issues as:
- Who pays for day-to-day expenses?
- How are major repairs and expenses to be shared?
- Should they share tax, utility and insurance fees equally or on a percentage basis?
- If there is a present mortgage to be paid, do they share that cost together, and if so, what is the effect on child and/or spousal support payments?
- What about a capital gains tax risk to the spouse who is not living at the former matrimonial home, and thus has another ‘principal residence’?
- What happens if one spouse is paying the mortgage down – should the other spouse benefit from the increase in equity that will gain over time?
The old real estate boom-times are changing in the Lower Mainland of B.C. These changes are affecting how couples address their shared real estate assets. A new way of thinking is required that can only benefit from obtaining independent legal advice along the way, to avoid unnecessary losses or future conflicts.
For guidance on this or any other family law issue please contact the Watson Goepel Family Law Group.
Jonathan Lazar is a partner and leader of the Watson Goepel Family Law Group.