It can work, and may actually help your relationship. Sometimes it can be detrimental, but sometimes it works out even better. Make sure you two trust each other completely and that you communicate the best you possibly can. A little bit if space can be a very good thing
Well, moving out might just save the relationship, but isn't getting married the ultimate goal? If you can't live together now, you probably won't be able to live together in the future either. So if you stay together living apart and that's the only way you can make it work, then there's no long term goal here.
You keep asking this question. I guess you don't want to hear the truth, but here's something no one else mentioned. When he leaves, it will be at least as long as his new lease (probably a year). Second, he will no longer be able to afford to help you out financially. That means that all of the bills he helped you rack up in the last 8 months are yours. Third, you said you have 2 children. They don't need a father figure coming and going as he pleases. No, your relationship won't work if you give him his freedom back. People that ask for "space" always find someone else to fill it.