Beyond the general personal and financial implications of a divorce, a joint mortgage on the family home raises specific decisions worth understanding well, because an agreement between spouses doesn't always automatically resolve either person's relationship with the bank.
An agreement between spouses doesn't automatically bind the bank
Here's something that surprises many couples going through a divorce: even if the settlement agreement states that one spouse will take on the entire mortgage, that agreement does not automatically release the other spouse from their liability to the bank, unless the bank itself expressly agrees to a loan modification removing them as a borrower. Until that modification is formalized with the bank, both remain jointly liable for the debt to the lender, regardless of what they agreed between themselves.
The main options with a joint mortgage
- Sell the property: pay off the mortgage with the sale proceeds and split what's left (or the outstanding debt, if the home is worth less than what's owed) as agreed.
- Award the property to one spouse, who keeps ownership and, through a loan modification, becomes the sole borrower with the bank, while compensating the other spouse financially for their share of the home's value.
- Keep joint ownership, where both remain owners and liable for the mortgage (a less common option, and generally transitional, except in specific arrangements such as temporary use by one spouse and the children).
Why the bank can refuse the modification
To remove a spouse as a mortgage borrower, the bank has to assess whether the spouse remaining as sole borrower has, on their own, sufficient repayment capacity under the bank's usual solvency criteria. If the bank decides they don't, it can refuse to formalize the modification, leaving both former spouses jointly liable to the bank regardless of what was agreed in the divorce.
The municipal capital gains tax and other costs of the transaction
Awarding the property to one spouse through dissolution of co-ownership (rather than a conventional sale) usually has more favorable tax treatment for certain taxes, though it's worth reviewing your specific situation with an advisor, since the taxation of these transactions has its own particularities.
The importance of getting everything formalized correctly
Given the complexity and long-term consequences of these decisions, it's worth getting specific legal advice during the divorce process to make sure the mortgage situation is properly resolved, avoiding unwanted future liability to the bank.
Simulate different individual financing scenarios
Our mortgage calculator lets you check whether the resulting payment would be affordable on your own - relevant information before asking the bank for a modification that removes one of the spouses.