When a marriage or common law relationship breaks down, sorting out the finances can be difficult. It’s an emotional time and there’s a risk of committing to decisions that end up being unaffordable for a single parent.
The family home is a particularly emotional asset, and a parent who wants to keep it for the sake of the kids could well be damaging their finances.
During a separation, the well-being of the kids is often the top priority. Parents want to minimize disruption by keeping their children in the same school, in the same neighbourhood and in the same house.
Some parents feel so strongly about keeping the family home that they are willing to give up other assets such as savings in a registered retirement savings plan, tax-free savings accounts and even pensions in order to buy out the other parent.
On paper, this is fair. Each partner is getting equal dollar amounts of the assets accumulated during the marriage. But owning the home can leave a parent strapped for cash if they don’t have enough income to pay for expenses such as the mortgage, property taxes, insurance, repairs and ongoing maintenance, on top of the cost of buying out their ex-partner’s share.
What happens to the family home when a marriage ends?
Family law, which drives the separation agreement, looks at the division of assets from a dollar perspective. But before signing an agreement, parents need to take a financial planning approach, and work out the details of their cash flow, both now and in the future.
Sara McCullough, an Ontario-based certified financial planner and certified divorce financial analyst, says many of her clients want to keep the family home. Her job is to help them decide whether they can afford it – before they sign the separation agreement.
“Decisions made in the separation agreement can make or break someone’s financial stability,” she says. And knowing how keeping the family home will impact your finances is key to making a clear-headed decision.
“What you need to know is how close you are to the edge financially. What are you trading off?”
Uncertainties such as fluctuating income expenses also have to be taken into account. If a parent is going to receive child support, they should know that payments are reviewed annually, and can fall if the paying parent’s income declines from a job loss, a change in careers or because of variable income as a self-employed worker. Canada Child Benefit payments decline after age six and are eliminated at age 17. And the parent’s own employment income might be uncertain.
How advisors can help older women navigate divorce, emotionally and financially
You also need to project how your expenses might rise. As kids age, their needs and wants change. While their extracurricular costs might be low now, the cost of having a child who loves a particular sport can get expensive at a more competitive level. Summer camps might come into the picture. And don’t forget postsecondary education, which can run between $25,000 and $30,000 a year for a university away from home.
Houses are notoriously prone to needing money. Repairs abound, from the roof to the driveway and everything in between. Plan to spend at least 1 per cent of the value of your home on maintenance – that can add $10,000 a year on a $1-million dollar home – and put aside some extra for appliances that break down, leaky plumbing and other essential repairs.
Ideally, there would be a healthy buffer in your cash flow. But even if money is tight, that doesn’t mean you have to forgo the house.
Ms. McCullough has done the detailed cash flow analysis with many clients, and sometimes suggests that they can take the home on for a set number of years. “If a client tells me this is a priority for now, I get it. You need to raise these kids.”
But when they graduate high school, they have to be prepared to sell it and move into something less expensive.
Anita Bruinsma is a Toronto-based financial coach and a parent of two teenage boys. You can find her at Clarity Personal Finance.