The pandemic had wide-reaching effects across Canada, upsetting the plans and financial goals of millions of Canadians who faced lost income and unemployment. In the wake of mass job loss in 2020, many mortgage lenders issued deferrals to help homeowners avoid mortgage arrears. This provided homeowners with a payment holiday while they had to stay at home and were unable to work. By the beginning of 2021, most of those deferrals had ended, even while lockdowns and employment interruptions continued.
That’s left many homeowners struggling or unable to keep up with payments and ending up in mortgage arrears or taking out bad credit to help stay afloat. Unfortunately, taking out credit to pay for your mortgage can also be a problem.
Taking Out Credit to Keep Up with Your Mortgage
Most homeowners prioritize their mortgage over every other debt, and with good reason. If you fall behind on payments and end up with mortgage arrears, the lender can foreclose or use power of sale, and you can wind up losing your home. For most, this is the worst-case scenario.
What some homeowners do to avoid falling into mortgage arrears is take out other types of credit to keep up. However, that is money you will have to repay eventually. Unless you can reasonably expect more income in the near future when you have to repay this debt, you’re only delaying the problem, as you’ll have less money to pay your mortgage in the future.
Building up bad credit can also make it harder to fix the situation. Piling on more credit card debt or other high-interest loans will make it harder to refinance your mortgage, as your credit score will deteriorate as you take on additional debt.
If you’ve already taken on unsecured debt to avoid falling behind on your mortgage, it’s time to talk to Licensed Insolvency Trustees in Toronto. Book a free consultation with us online and tell us more about your financial situation. By getting on top of your unsecured debt, you can make more room in your budget for your mortgage.
What Are Mortgage Arrears?
You can’t borrow your way out of mortgage arrears. The best path forward is dealing with them head-on. First, it helps to understand the situation you’re in.
You fall into mortgage arrears when you fall behind on your debt obligations, i.e., you miss a monthly payment. You still owe the money, and it becomes harder and harder to catch up as new payments become due. Usually, lenders consider you to be in arrears if you have missed payments for three months or longer.
What happens from there is that your lender can pursue one of two options: power of sale or foreclosure. In power of sale, the mortgage lender evicts the occupants if the borrower is in default and sells the property. After the sale, the former property owner is entitled to any money left over after their mortgage is paid.
In foreclosure, the lender takes the title of the property, becoming the owner and keeping any profits made from the sale of the home. However, foreclosure is a considerably longer process, and lenders often opt for power of sale first.
That said, the lender’s first preference is for the borrower to repay their mortgage. That means that you can often work with your mortgage lender to find a compromise.
How Long Can a Mortgage Be in Arrears?
Legally, a lender only needs to wait 15 days after a missed payment before beginning the power of sale process. There is a redemption period during which you can pay the obligations you’ve fallen behind on. The lender usually won’t begin the foreclosure process until 3 to 6 months of missed payments.
Because the lender can pursue either option, it’s imperative that you talk to the lender sooner than later.
How Do You Deal with Mortgage Arrears?
What can you do with a mortgage in arrears? It’s important to act quickly. Delaying or ignoring the problem will only make it worse. If you’re not sure where to begin, a good place to start is Canadian credit counselling with a Licensed Insolvency Trustee. Although secured debts, including mortgage arrears in Canada, cannot be included in a consumer proposal or bankruptcy, a Licensed Insolvency Trustee can help you find a better way to manage your debt and catch up on your mortgage. We can also walk you through your options and first steps. There are three options you can take to deal with a mortgage in arrears.
#1 Refinance
You may want to reach out to other lenders to refinance your mortgage or modify your present loan. The goal is to refinance with a longer term or a lower interest rate, reducing your monthly payments and making them affordable. This takes careful financial planning. You should be confident that you can make your new payments, or else refinancing is not the right solution.
Refinancing your home can be a challenge. The lender wants to make sure you can meet these new payments, and if you don’t meet income requirements or you have a poor credit score, it won’t be easy to get a new mortgage. High-risk lenders charge higher interest rates, and you’re likely better off avoiding them.
#2 Sell Your Home
The strength of the real estate market can work in your favour. If your home is worth more than your mortgage, you should be able to sell your home, walk away from your mortgage, and still have money left to find a new place.
Selling your home to downsize or rent can feel like a step backward. Many people dream about homeownership, and it’s one of the biggest financial goals they set for themselves. But if you buy a home that’s too expensive, or your home becomes too expensive because of a change in income, you have to adjust to your financial reality.
Be careful about the costs of downsizing. With each transaction, you’ll be paying real estate agent fees and land transfer taxes. It can make a lot of sense to rent until your finances are in better shape.
#3 Consumer Proposal
If you’re struggling with your mortgage because you’re dealing with so many other costs and debts, the answer may be restructuring your personal finances before doing anything with your mortgage. Filing a consumer proposal can restructure debts on credit cards, lines of credit, payday loans, tax debt, utility bills, and sometimes student loans. For many homeowners, relief in other areas of their life gives them enough room to catch up on their mortgage without jeopardizing any of their assets in bankruptcy.
A consumer proposal will have an impact on your credit, and it can be difficult to qualify for a mortgage after a consumer proposal until your credit has had time to recover. A consumer proposal is a good way forward if your goal is to remain in your home for an extended period of time, but you need mortgage arrears help right now.
Can Mortgage Arrears Be Written Off?
There are rare occasions where mortgage arrears can be eliminated through consumer proposals or bankruptcy, such as when your home is worth less than your mortgage. Canada is in the midst of a very strong housing market, and if you purchased your home even just a year or two ago, it’s likely appreciated in value. However, there are risks of a correction that could leave recent homebuyers in a precarious position down the road.
In the event that your home is worth less than your mortgage and you fall behind on payments, here’s what can happen. The lender will sell the property, even if it’s for less than the mortgage. They can then pursue you for the remaining balance of your mortgage, but this is now unsecured debt. That means it can be included in bankruptcy or consumer proposal, giving you the chance to get out of mortgage debt and walk away.
Can You Sell a House If the Mortgage Is in Arrears?
As long as your lender has not foreclosed or completed power of sale already, you can still sell a home in mortgage arrears. If you can’t afford your mortgage and you need to downsize, it’s better to be in control of the sale.
Selling is a smart way to get out of a mortgage that you can no longer afford. You can pay off your mortgage arrears and use the equity to start over.
Paying Your Mortgage vs Saving for Retirement
Fear of falling into mortgage arrears motivates many homeowners to pay off their mortgage as quickly as possible. But does it make more financial sense to contribute to your RRSP or mortgage payments? When you have extra money at the end of the month, you may be tempted to put more into your mortgage. Depending on the contract, you should be able to put some extra money toward your mortgage without penalty.
However, your retirement plan depends on you saving early and your wealth growing faster than you could save yourself. The choice depends on the interest on your mortgage. Whenever the interest is higher on your debt than the possible returns from investing, it makes sense to pay off debt first.
If you’re struggling with mortgage arrears, contact us for a free consultation. We’ll work with you on finding a path back to financial stability.
