What To Do When You Can’t Afford Your Mortgage

Got a six-month mortgage holiday due to COVID? 

Lost your job or been disabled, and don’t know where the next mortgage payment is coming from?

If your deferred mortgage payments are ending soon, our real estate lawyers have tips for you on what to do when you can’t afford your mortgage. 

Quick Read

Telling your lender

Lender’s right to power of sale

How foreclosure works

Borrowers’ mortgage obligations 

Reamortizing your mortgage

Consolidation or bankruptcy?

Should you sell or walk away?

Telling Your Lender You Can’t Pay

Your time is up. Now what? 

The first step in figuring out what to do when you can’t afford your mortgage is to talk to your lender. Your lender is likely expecting your call, and may be able to extend your amortization period or give you a variable rate mortgage to reduce the mortgage payments until you recover financially. 

Government programs like CERB and EI are income to your lender, and can be used to temporarily assist with payments. If you’ve suffered an injury, or may be without work for a long time, chat to a disability counsellor or bankruptcy trustee. They may have helpful ideas about how to make your money go further.   

When You Can’t Pay Your Mortgage, What Next?

What happens if you can’t afford your mortgage after even your best efforts fail depends on your next move. Your lender could:

  1. Demand immediate and full repayment.
  2. Apply to the court to sell your home.
  3. File a foreclosure application.
  4. Call in the mortgage by default.

More on the four steps to foreclosure

Lender’s Power of Sale

Whatever you do, don’t ignore your lender. In minutes, a court can sign off on an order allowing your lender to sell your home. 

  • When you fall behind on mortgage payments, your lender will call or send a reminder letter.
  • If you still can’t or won’t make mortgage payments, a demand letter will follow, requesting immediate payment of the full mortgage amount owing.
  • As a next step, the bank can use the power of sale clause in your mortgage agreement to simply sell your property and transfer the legal title to the buyer. 

You could lose your home without even having your day in court. Ontario law on power of sale (see section 24, part II). 

Going into Foreclosure When You Can’t Afford Your Mortgage

Going into Foreclosure When You Can’t Afford Your Mortgage

More politely, but just as disastrous for you, is a foreclosure application. With the court’s consent, your lender can take possession and foreclose on your home. Legal costs, realtors’ commissions, home appraisal fees, and any other costs are added to your outstanding mortgage amount. Lenders often low ball foreclosures to sell them as quickly as possible. Even if you once had equity in your home, it could be gone. 

Defaulting When You Can’t Pay Your Mortgage

We trust you probably aren’t making plans to intentionally default. But watch out you don’t default by mistake by not reading the fine print in your mortgage agreement. Your mortgage is a contract and like any, it creates obligations for you. You could violate your contract if you:

  • get a second mortgage without telling your lender
  • fall behind on paying common element fees
  • neglect your taxes
  • cancel or stop paying property insurance
  • let your home fall into disrepair
  • or sell your home on Kijiji without your bank’s consent.

Your lender can call in the mortgage at any time. Your home is their security for the mortgage they lent you. They’ve got eyes on you.

What Happens Next When You Can’t Afford Your Mortgage?

How to get rid of overwhelming debts if can’t afford your mortgage:

You Could Reamortize

What to do? If you have some financial resources but your mortgage payments are too high, ask if your lender can adjust the amortization period. The difference to your payments can be substantial — $2,410.98 a month for a $350,000 mortgage amortized over 15 years, compared to $1,644.43 amortized over 25 years. Your interest costs will go up, but you can always change the term later or make lump sum payments when your finances improve. Documents lenders need if you refinance.  

Try a Private Mortgage

If that doesn’t work out, don’t despair just yet. As long as you have some income — from spousal support, commissions, self-employment, family contributions, renters or other sources — you could try to refinance your mortgage through another lender. Mortgage brokers can connect you to  private lenders when conventional banks, credit unions and trust companies have turned you down. Interest rates are higher, but you could get more flexible terms. Private lenders are institutions or investors who make high risk mortgage and consumer loans to borrowers with financial troubles, a bad or no credit history or who otherwise don’t qualify. They could just be out to get your business. Qualify for a private mortgage.  

Get Your Loan to Value Ratio

Private lenders take a bigger risk than traditional lenders. Consequently, they look for greater security in case you default. Using your home’s loan to value (LTV) helps them decide if your property is worth mortgaging. Find the LTV by dividing your home’s market value by the mortgage amount you need. A $500,000 condo with a $400,000 mortgage has a LTV of 25%, potentially qualifying you for a private mortgage loan. Ask a mortgage broker about private lenders and other non-traditional lending sources. Use your home equity line of credit. 

How lenders value your home’s worth. 

Consolidate or Go Bankrupt

If cash flow is low, a formal consumer proposal could get you much needed relief and allow you to keep your home. Consumer proposals are legally binding on unsecured creditors, reduce and settle outstanding debts, and prevent legal action like wage garnishments. You make a single monthly payment and hang onto assets like your home, a car, and investments. Bankruptcy is more drastic, but can still keep you in your home if you can manage the mortgage payments and your home’s equity is under $10,000. Working with a credit counsellor.  

Selling Your Home When You Can’t Afford Your Mortgage

If you have any equity in your home, you may be able to make interest-only payments while you list it for sale. Selling allows you to keep your credit rating intact (as much as possible anyway) and collect the difference between the outstanding mortgage and sales price. Divorce and bankruptcy, how it affects you. 

Walking Away From a Mortgage

Walking away from your home is never easy. But if you truly can’t afford your mortgage and your house is worth less than you owe, you could sign a quit claim deed. The deed releases you from your mortgage obligations and transfers ownership to your lender. You do what you can. 

Court-ordered forced sale in divorce settlements.  

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Finalize Your Mortgage Refinance

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