In the life of a couple, buying a home is usually a happy event, but also a stressful one, because it requires many decisions (and often a great willingness to compromise!). Since it is a major investment, preparation is a must. You should leave nothing to chance, particularly concerning the financial aspect of the transaction.
We will examine here different situations that can arise when purchasing a home when the spouses’ financial contribution is unequal, either in terms of the down payment or with regard to the joint expenses. Such a disparity can often generate tensions.
We will therefore suggest possible solutions for several typical scenarios that we have developed.
Stephanie and Robert have been married for two years and plan to buy a home worth $200,000.
Formalize each spouse’s rights and obligations
It is highly recommended to put down in writing the terms of ownership of the home before the actual purchase, when things are harmonious in the couple. It would be wise for Stephanie and Robert to sign an indivision agreement which will clearly establish their rights and obligations as co-owners.
Scenario 1 – Unequal outlays at time of purchase
In the indivision agreement, it could be stipulated that, when the home is sold, each of the spouses will get back their initial outlay as well as the proportional increase in value.
For example, if the cost of buying the home was $200,000, Stephanie made an initial outlay of $30,000, which represents 15% of the initial value of the home. If this home is valued at $250,000 at the time of sale, Stephanie will get back her initial outlay of $30,000 plus 15% of the increase in value of $50,000, i.e. $7,500, for a total of $37,500.
The same calculation will be made for Robert. The two spouses will then share the balance of the selling price according to the respective share held by each, after deducting the outstanding balance of the mortgage at the time of sale.
Scenario 2 – Sharing of joint expenses and unequal salaries
Stephanie earns a salary of $60,000 after taxes and Robert has a net annual income of $40,000. Consequently, Stephanie earns 60% of the couple’s annual income, while Robert earns 40%. The couple’s joint expenses (including household expenses) come to $50,000 a year.
The indivision agreement can provide that Stephanie pays $30,000 (60%) of the joint expenses, while Robert pays $20,000 (40%).
If each of the spouses wants to have an income of $25,000 a year for their personal expenses, the agreement can provide that Stephanie pays $35,000 of the joint expenses and Robert, $15,000.
Each spouse contributes to the routine household expenses (heating and electricity, snow removal, lawn mowing) according to their respective capacities (60% for Stephanie and 40% for Robert), while the expenses directly related to the home, such as taxes, insurance, joint costs (if applicable), are paid according to the respective share held by each of the spouses as specified in the indivision agreement.
The point to remember is that all of these solutions are valid. It is up to Stephanie and Robert to agree on the solution that best suits them.
If nothing is stipulated in the purchase contract, the Civil Code of Quebec provides that each of the spouses is presumed to own an equal share of the home.
If the purchase price of the home was not paid equally by the spouses and they do not contribute equally to the expenses, it is essential to establish in the indivision agreement the exact share of ownership held by each.
Many other terms and conditions can be provided in the indivision agreement, such as:
- A co-owner who wants to sell their share must first offer it to the other owner before selling it to a third party.
- A purchase option giving the surviving co-owner the opportunity to buy the share that belonged to the deceased co-owner.
Scenario 3 – Purchase of a home by de facto spouses
Olivia and Lucas have been de facto spouses for two years and wish to buy a home together.
Since the spouses do not have the same rights and protections as married couples or couples in a civil union, it is clearly preferable for Olivia and Lucas to sign a cohabitation agreement.
This agreement will contain more clauses than an indivision agreement in order to provide for, among other things, the terms and conditions applicable:
|During cohabitation||In case of breakdown|
Vigilance is always a must
Knowing that co-owners have many options concerning the choice of clauses and that a poorly written agreement or an oversight can have nasty consequences, we recommend that you obtain the advice of competent professionals when drafting an indivision agreement or a cohabitation agreement.
Nathalie B. Poisson, LLB., D.D.N.
Notary and Assistant Manager (interim), Professional Practice