Date

April 7, 2022

What if I can’t pay my mortgage?

The economy has many Canadians wondering, “What happens if I can’t pay my mortgage?” The answer isn’t, “I lose my home.” Keep reading for solutions.

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What if I can’t pay my mortgage?

Woman concerned about finances

Many homeowners are worried about what inflation and higher interest rates mean for their household budgets. Discouraging economic forecasts are especially troubling for homeowners living paycheque to paycheque and who already concerned about being able to afford their mortgage payments.

While inflation squeezes everyone on everything from heating bills to frozen pizza, there is reason to be optimistic. Continue reading to learn about your options, from rejigging your budget to finding debt relief.

Prepare for higher mortgage payments before they hurt you

While anything you do will be better than doing nothing, these four steps will help you put your best foot forward.

Step 1: What is a mortgage and how does it work?

A mortgage is a loan given for the specific purpose of buying a piece of property. Every month you make a mortgage payment that includes a portion of your principal (the amount you borrowed) and interest.

With a fixed-rate mortgage, the borrower makes the same monthly payments regardless of interest rates hikes. It’s less risky for a borrower but comes with a higher interest rate.

With a variable rate mortgage, the borrower’s monthly mortgage payments may change as interest rates change. It’s usually cheaper than a fixed rate at the outset but might not stay that way.

Interest rates are expected to climb 2.5% over the next three years, potentially taking the monthly payments on a $350K variable mortgage from $1,850 a month to $2,350 a month.

Many homeowners with variable rate mortgages will feel this change incrementally. Those with fixed rate mortgages would feel it all at once on renewal.

The more you know, the better prepared you’ll be to make big decisions. Here’s another resource with a more comprehensive explanation of how interest rates may affect your personal finances.

What is the risk of negative equity?

One risk associated with Canada’s property bubble is the chance that housing prices decline and leave homeowners with negative equity. Equity means the value of the property you own, minus your mortgage debt. Negative equity is when the mortgage amount exceeds the value of the property. This can create problems for the homeowner, especially if they try to remortgage the property or if they try to sell it, leaving them with a shortfall to cover.

What happens when you stop paying your mortgage payment?

You should avoid defaulting on your mortgage payments at all cost. The consequences can be very severe and can lead to your house being seized by the lender. This can lead to foreclosure or a power of sale. In Canada, a power of sale is more common than foreclosure because it allows the lender to sell the property and collect any shortfall. Conversely, if there is money left over after the sale of the property, it gets returned to the homeowner.

Step 2: Stress test your budget

It’s a good idea to find out how much your mortgage payment will be when mortgage rates rise and to adjust your budget accordingly. An even better idea is to stress test your budget by assuming that interest rates have already gone up by 2%. What do your payments look like if interest rates are 2% higher? You can do this exercise by using the Canadian government’s mortgage calculator.

Step 3: Examine how you’re servicing your high-interest debts

Always try to reduce your high-interest debt. If a $25K credit card debt with 21% interest costs $5,250 to carry and a $50K line of credit debt at 8% costs $4,000, reallocating your debt service dollars to clear the credit card debt faster makes sense. Don’t be afraid to make only the minimum payments on your low-interest debts. In the long run, you can afford to carry those loans for longer.

Step 4: Revisit your variable monthly budget

The first three steps were relatively easy. This one is harder, but you’ve come this far so keep going.

Everything in your monthly budget short of your mortgage or debt service is a variable cost.

For example, you can stick with the work wardrobe you have. You can shop at a different grocery store. You can enroll your kids in more affordable summer programs. You can save money on gas by committing to biking instead of driving when you can.

Some things may be fixed and you can’t eliminate them, and that’s okay. You have to train yourself to be extra judicious about what you’re unwilling to cut, and you’ll have to make hard decisions. But if the result is a sustainable way to keep more money coming in than going out, you’ll be in good shape.

I tried all these things and it’s not working. Now what?

Sometimes you can’t fix things on your own. You may need to ask for help. If you have fallen behind on your mortgage debt, explore the following options.

Ask for a payment deferral

One short-term solution is to speak with your lender, explain your situation and apply for short-term mortgage deferral. This is a deal you make with your mortgage lender to halt payments for a specific period of time. It could be a welcome reprieve as you work on reformulating your budget or setting yourself with more income like with a second job. You’d have to pay back what you missed, but you’d ideally be doing that when inflation has subsided a bit—and after you’ve gotten used to your new spending habits.

Renegotiate your mortgage debt

Another starting point could be renegotiating or restructuring your mortgage with a longer amortization period to lower your monthly payments. If you have a 20-year amortization, the lender may agree to restructuring your mortgage under a 25-year amortization and include all arrears.

What about selling my home?

Depending on how much equity you have in your home today, this could be a good option. If you are expecting positive equity after the sale of your home, you will want to keep the profit for yourself before your lender gets involved. If you are left with a shortfall or negative equity, speak with a Licensed Insolvency Trustee (LIT), who can help provide debt relief in the form of a consumer proposal or bankruptcy.

File a consumer proposal to keep your home

Another option to consider is to look at your overall debt load and find ways to reduce your debt so you can afford your mortgage payment. An LIT can provide important debt relief counselling and is the only debt professional who can renegotiate your unsecured debt by helping you file a consumer proposal. A consumer proposal offers immediate debt relief by reducing your unsecured debts by up to 80% and allows you to keep your assets.

The generational wealth that comes from owning property is undeniable and will pay dividends in the long run. Being strategic with your financial decisions in unorthodox times like these—and working with professionals who know the ropes—will get you on the right track so you can pay your mortgage and keep your home.

Are you interested in learning more about managing your debts so you can keep your mortgage and your home?

Speak to a Licensed Insolvency Trustee today.

Date

April 7, 2022

What if I can’t pay my mortgage?

The economy has many Canadians wondering, “What happens if I can’t pay my mortgage?” The answer isn’t, “I lose my home.” Keep reading for solutions.

Share
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