In an earlier blog post I described the Family Property Act and the effects it will have on unmarried people that live together. The law in this area is uncertain and my conclusion was to strongly recommend cohabitation agreements in these situations. For most people considering a cohabitation agreement, the first question is what will happen to the equity in the home if the relationship ends?
When purchasing a home one of the first questions people consider is how they will finance the purchase. Similarly for cohabiting couples it’s important to consider financing options but there is added complexity because it is necessary to consider who is responsible for that financing and who will receive the equity from the home if the relationship ends.
The Family Property Act gives couples flexibility to make their own decisions as long as they each have independent legal advice and follow a few simple requirements. There are a few common trends that should be helpful to consider before speaking to a lawyer. In most cases we see one of the following two options: the responsibility for financing and ownership being shared equally or not being shared at all. Between these two extremes, there are many other options available.
In many cases we see people who have similar incomes or people who are saving for their first home together agreeing that when they purchase their first home the equity will be divided equally as well the expenses. This is relatively simple. Usually both people are listed on title to the home and on the mortgage. If the relationship ends, the home would be divided equally or one person would pay the other for their share.
Another option we see frequently is the opposite. In many cases where one party has a significantly lower income, less property or a low credit rating, the other may want to purchase the home in their own name. The owner would be the only one to appear on the title to the home and would be the only one responsible to the bank for paying the mortgage. The other spouse would pay a portion of the expenses for the home essentially as a renter. We usually determine how much by looking at rental rates for similar properties in the community and giving a discount of at least 50% of those rates. They would not acquire any equity in the home but in return they would be able to have their home for less, they would have less responsibility, they may be able to use their credit for other things, or they may live in a home that they otherwise would not be able to afford. There are advantages to both spouses. If the relationship ends, the owner keeps the home.
In between these two extremes there are many other options available that can be negotiated between Family Law Lawyers. For example one person could pay a reduced portion of the equity and also receive that same portion of the equity if the relationship ends. In extreme cases this would be unfair if for example one person paid 5% of the down payment on the home it would be unreasonable for them to pay only 5% of the monthly expenses while still enjoying the whole home. This option would be more appealing if the amount of the down payment was roughly similar. In these situations we look at a rent-to-own arrangement. This is similar to the rental arrangement described above but the parties could determine an amount of the monthly payment each month that would go towards the equity in the home and their lawyers would determine what percentage of equity the renter would receive in the home each year while the couple is living together. This is significantly more complex but allows for a custom-tailored solution that is fair to everyone involved.
For more information about purchasing a home, contact Fric Lowenstein & Co and follow this blog. If you are interested in having a cohabitation agreement prepared or you need a certificate of independent legal advice about one prepared by your spouse, contact me, Tyler Fric.