What to do if you can't pay your mortgage
By Gail Johnson
With gross levels of consumer debt and rising real-estate prices across the country, it’s a wonder that Canadian home-owners are able to make their mortgage payments. Add to the mix limited job security and increasing self-employment and freelance work, and it makes you wonder: what would you do if you couldn’t pay your mortgage?
Apparently, that’s a question that has a lot of Canadians stumped.
According to a new survey by Lawyers’ Professional Indemnity Company (LawPRO), 61 per cent of Canadian adults don’t know what options are available to them if they can’t pay their mortgage. That number rises to 74 percent among those aged 18 to 34.
Those figures are striking, considering that 79 percent of Canadians own or have considered purchasing property, according to the online survey of more than 1,500 randomly selected Angus Reid panelists.
All sorts of circumstances can lead to financial turmoil, such as job loss, illness, and divorce. But if things get to the point where paying the mortgage is a problem, there are steps you can take to improve the situation--and that don’t involve panicking.
The worst thing you can do is avoid your lender, says real-estate lawyer Ray Leclair, vice president of public affairs at LawPRO. Don’t wait for the bank to call you; rather, let your financial institution know as soon as possible that you’re in a situation that’s going to make one or more mortgage payments impossible.
“The earlier you get onto it, the better the outcome could be, the more options that could be available,” Leclair says. “For this to work well is [achieving] a negotiated settlement. To get the parties at the table is not often easy, but with lenders the earlier you do it, the more receptive they are to the issue, especially before it gets into collections and their enforcement branch.”
Avoid racking up credit-card debt
It’s never a good idea to rely on your credit card to get you through tough times, but that’s especially true when the mortgage isn’t sustainable over the long term, says accredited mortgage professional Rob Regan-Pollock, senior mortgage consultant at Invis -- Team Rob Regan-Pollock.
“I’ve seen cases first-hand where people are driving up high-interest debt,” Regan-Pollock says. “If they haven’t been making their mortgage payments, and they come to us looking for equity takeout or restructuring, their credit rating may be harmed,” making new deals that much harder to secure.
Several possibilities exist that could help you make it through.
- Restructure payments. You can work with your existing lender to blend credit-card, line of credit, and mortgage payments to get a better payment plan, Leclair says.
- Refinance. With mortgage rates being as low as they are, it’s not uncommon for people to break a mortgage in order to lock in at a lower rate. You have to ensure it’s still worth it once the mortgage penalty is factored in.
- Skip a payment. If you’re ahead of your amortization schedule—say you’ve been making biweekly payments instead of monthly or have put down a lump sum in the past—your lender may offer skip-payment options, Regan-Pollock says. That’s another reason to open the lines of communication from the get-go.
- Look into revenue possibilities. “We don’t often think of our homes as revenue generators, but think about bringing in a boarder or converting part of it into space for a tenant,” Leclair says. “You may be able to go into your bank and say ‘I’ve found a way to get an extra $1,000 a month from the property and I’ll be able to pay my mortgage that way.’”
Just be sure that doing so is legal, he notes; there may be zoning restrictions and fire regulations to work with.
- Sell. If maintaining the mortgage isn’t possible, selling may be your only option. But try to sell it on your own terms, Leclair suggests.
“If you’re behind in your payments, the bank may be looking to put it up for power of sale, probably at a lower price [than what you’d try for] because they don’t have the same investment in it,” Leclair says. “Maybe the strategy is saying ‘Mea culpa. I know I’m in arrears here’s my plan: I’ve got an agent, here’s my listing, we think it will be sold in 60 days.’ Maybe walking in with a plan like that can get some leeway. The lender may want confirmation from the agent or a list of open houses, but they may work with you at that point.”
No matter what steps you take, Leclair advises consulting professionals who can look at options without the charged emotions that a home owner may have, and being prepared before talking to your lender. “It’s like any negotiation: you don’t want to go to the other party without doing your homework,” he says.
Ideally, of course, this kind of situation would be avoided altogether.
“Have a manageable plan for contingencies,” Regan-Pollock says. “Have a few months’ savings set aside for rainy day funds.
“When getting into real estate, people may not want to qualify necessarily at the maximum their income supports but the maximum that’s suitable based on their lifestyle and unique circumstances,” he adds. “There are ways of avoiding any surprises if you’re not able to build up a buffer. Don’t overstretch yourself in the first place.”