Just as Canada’s real estate marketplace appeared to be stabilizing and was poised for a strong selling season, the fear hit. While rates are at multi-year lows, some Canadian homeowners will be faced with the untenable situation of whether they can pay their mortgages. Miss a payment and you risk default.
What exactly is a mortgage default, anyway?
A mortgage default is when a lender does not receive payment from a borrower to satisfy the loan agreement. Even a late payment can technically push a homeowner into default status, however, most lenders will not seek legal action until a homeowner stops making his or her mortgage payments for at least two months or more.
Once legal action is taken, the lender can take possession of the property and sell the home in order to recoup money owed. This is known as a foreclosure or judicial sale.
Unlike in the U.S., lenders in Canada who foreclose on a home do not have the option of selling the property for less than fair market value, which is why only a relatively small number of foreclosed homes in Canada end up in auction. Most are sold through the MLS as a “forced sale” or as a “court ordered sale.”
Not paying your mortgage isn’t the only way to default. For example, a homeowner who neglects to pay their home insurance is in breach of the contract and could lose coverage. Since virtually every mortgage contract requires a homeowner to carry valid home insurance, this could push a homeowner into default status.
Another way to find yourself in default is to neglect to pay your property taxes or by taking out a second mortgage without first informing the original mortgage lender. Even the act of neglect — by allowing your home to become shabby and run down — can trigger a default.
That’s because a mortgage default, in general terms, is when you fail to live up to the contractual obligations of your mortgage, which include paying the amount due every month (and on time), as well as keeping adequate home insurance, paying all taxes and utilities associated with the home, and keeping the value of the property from depreciating significantly, through ongoing maintenance.
What happens if you default on your mortgage?
Most lenders give you a 30-day grace period. And some lenders won’t consider you in technical default until you’ve missed three consecutive mortgage payments or more.
However, once you reach this point, your lender will send you a friendly reminder that your last mortgage was missed and that you are now late — also known as ‘in arrears’ — in paying back your mortgage loan.
The mortgage lender will also report your late payment status to one or both of the Canadian credit bureaus, Equifax Canada and TransUnion Canada. Credit bureaus keep track of payments and non-payments and, along with other factors, build a credit history for each consumer in Canada. Non-payments or defaults hurt your credit history and lower your credit score — making it harder for you to get credit, lower rates, insurance and, in certain circumstances, may even block you from getting employment offers.
At this point, your mortgage lender will either start legal proceedings to take ownership of the home or will make a final effort to get the money owed by referring your default account to a collection agency. If they opt to go with a credit agency this action will also be reported on your credit file and your credit score will drop even further. If the credit agency fails to obtain payment, the lender will then start the legal proceedings to take ownership of your property.
Once in court, the lender simply has to prove that you are in default of the mortgage contract, with no attempt to rectify the situation. This is when a lender is awarded ownership of the property and can sell the property in an effort to recoup money owed.
Why is mortgage default bad?
The biggest downfall to a foreclosure — other than losing your home — is the negative impact it has on your credit report and credit score. A foreclosure will remain on a credit report for at least six to seven years, with its impact gradually decreasing over time. In the initial years, you will find it very hard to get approved for credit cards or car loans and will only be given credit if you pay higher interest and more fees for any loans.
For that reason, many homeowners faced with the possibility of mortgage default, look for ways to avoid this step. Here are 3 key strategies:
Step #1: The first step to avoiding default and foreclosure is to know your mortgage privileges. Many mortgage contracts offer a variety of pre-payments options. Usually, borrowers are encouraged to use these as a way to pay down their mortgages faster. However, in extreme circumstances, like a temporary loss of income that prevents you from making a mortgage payment, it’s a good idea to opt for the “payment deferral” or “skip-a-payment” option which allows you to skip a monthly mortgage payment (or two), which can help you avoid a mortgage default.
The downside is that a missed payment means the principal debt is not paid down, which results in more interest added to the amount owed to the lender. But if the inability to make your monthly payment is temporary, this is a great option to exercise.
Step #2: Contact your lender
If a skipped payment or two is not sufficient to help you avoid default, it’s time to contact your mortgage lender. Don’t wait until you’ve missed your mortgage payment; talk to your lender as soon as you start having financial problems.
Most lenders have plans in place that will allow you to restructure your mortgage to make the monthly payments less costly and more manageable. That’s because lenders are in the business of making a profit off the interest on the loan, not in the reselling of real estate. They may offer you temporary payment deferrals, payment period extensions (amortization), which will lower your monthly mortgage payment.
For example, a lender may change a borrower’s mortgage from a one-year variable, to a longer, five-year fixed interest rate loan. This will shield a homeowner from sudden increases in their monthly payments and reduce the amount that is owed each month in order to repay the loan.
Step #3: Talk to a mortgage professional
If you find your lender is not willing to work with you to find a solution, consider talking to an independent mortgage broker, someone who specializes in bad debt repair. A mortgage broker will work with a number of different lenders to find a solutions, such as refinancing.
Step #4: Get help from the government
While the financial help offered by federal, provincial and municipal governments continues to evolve as the COVID-19 pandemic continues, there is one government institution that is ready and capable of helping, right now.
The Canadian Mortgage and Housing Corporation (CMHC) is a government agency that is tasked with helping Canadians secure affordable mortgages and housing. While the agency offers a great deal of insight and information on how to avoid default, it’s also willing to work with lenders and other mortgage professionals, to help resolve or avoid mortgage default and keep owners in their homes.
What if you’re already in default?
If you find yourself already in a position where you’ve missed a payment, contact your lender immediately. As stated, most lenders would prefer to find a solution that enables you to pay the debt back in a systematic way.
Lenders do not want their clients defaulting and forcing them to seek legal action, as it is time consuming and expensive. In fact, selling foreclosed home is often a net loss for them, so they are usually keen to help you.
If you are a homeowner having problems paying your mortgage, your lender, a mortgage broker and even CMHC can often offer creative solutions to help. All you have to do is ask.