With a rising cost of living and increasing interest rates in Canada, you may find that your mortgage payments become more difficult to make. You may equally be facing negative equity in your home, where your mortgage debt is higher than the value of your property. Drowning in mortgage payments is fun for no one, and you may well be wondering if you can simply walk away from your mortgage if you are over-mortgaged and facing negative equity. You are likely feeling stressed and overwhelmed, unsure of what to do, and keen to avoid foreclosure or a power of sale. So, what happens if you walk away from a mortgage? And what can you do if you simply cannot afford to pay off your mortgage after a sale or a foreclosure? In this article, we explain what to do.
What is a mortgage shortfall, and how does it happen?
If you own a property and your mortgage is valued higher than the equity, or the value of your home, you are considered underwater. If, for instance, you were to sell your home, you would be unlikely to sell and receive the full mortgage you agreed. This is also known as having negative equity. There are a few causes of a mortgage shortfall. These are often:
- A decline in property value. You may have bought at the your property at a peak, with a high-ratio mortage. After this, the market may have dropped. If the list price of your property drops, you are considered underwater – even before you add selling fees into the mix.
- Debt consolidation. The average homeowner has around $50,000 unsecured debt. If this is consolidated via a second mortgage and the market drops, you may discover that you have negative equity in your property versus the mortgage debt you have.
- Negative investment cash flow. If you have bought an investment property and have a secured line of credit to plug the gap in the rental shortfall, you could find yourself with negative investment cash flow. If the market does not grow enough to cover your cash low, you may find you have negative equity.
What is ‘full recourse’?
If you are underwater on your mortgage, you may well be considering selling your property to avoid getting into further financial difficulty. Thankfully, you may not need to do so. If you are able to stay current on your mortgage payments, you may be able to wait until the market picks up, at which point your property’s price will likely increase too. This increase in your property’s value might allow you to break even. Eventually, you may even owe less than the property’s value in the future. If, however, you cannot keep up with your mortgage payments and find yourself in default, your lender will begin to collect. At this point, if you fail to respond and cannot catch up on missed mortgage payments, your lender will begin initiating a power of sale. If you sell your home with a mortgage shortfall, or if you find yourself in foreclosure, you will still need to pay your lender the difference between your outstanding mortgage and the proceeds of the property sale. This is what is considered to be ‘full recourse’, and your lender has a legal right to pursue this amount.
What should you do if you have a mortgage shortfall?
Just as with any debt, there is an expectation that you will make repayments. If you cannot make these repayments, your creditors will take actions to collect. They can also pursue legal action, including a wage garnishment – they need to get an order from the court before they can do so. In Ontario, once you have sold your home, a mortgage shortfall becomes an unsecured debt. You lose the security of your home being the asset attached to your loan once it is sold, turning a secured debt into an unsecured debt. Having an unsecured debt does have its advantages when it comes to gaining debt relief. Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief, so they are a good first port of call. There are two legal options that can remove your debt for good:
File a consumer proposal
A consumer proposal is a legal form of debt settlement that can reduce your unsecured debts by up to 80%. These debts can include your mortgage shortfall once your home has been sold. Working with a Licensed Insolvency Trustee, you will propose an affordable monthly repayment figure. Your trustee will then negotiate with your creditors on your behalf. Most creditors are likely to accept the terms of a consumer proposal over bankruptcy because they are likely to receive more in the way of repayment. Advantages of filing a consumer proposal include the ability to keep your assets, and protection from your creditors via a stay of proceedings which is triggered when you file.
Another option for dealing with mortgage shortfall debt is to file bankruptcy. Bankruptcy can clear your unsecured debt altogether to allow you to begin a fresh financial future. It is the process of assigning any non-exempt assets over to your Licensed Insolvency Trustee in exchange for the clearance of your debts. This means your mortgage shortfall debt will be cleared completely. Bankruptcy is an ideal form of debt relief for those who do not have assets to lose, or who are looking for a clean slate when it comes to their finances.
What happens if you walk away from a mortgage in Canada?
As full recourse legislation is in place across Canada, lenders must allow homeowners some time to deal with their underwater mortgages, instead of allowing them to simply walk away from their mortgage. In this sense, mortgage shortfalls simply become an unsecured debt once the sale of your property has been finalized. The borrower will still owe the outstanding debt, either to the lender or the mortgage default insurance company. Homeowners can walk away from their mortgage debts if they file a consumer proposal or a bankruptcy, which will reduce or clear their debt completely. They can then move forward with their lives.
How does a mortgage default impact your credit report?
Your credit report and subsequently your credit score are impacted by any information reported to them by Canada’s two primary credit bureaus, Equifax and TransUnion. The credit bureaus can therefore see information on mortgages, including any defaults. These will be noted on your report, and will have a knock-on effect on your credit score. A mortgage default will likely remain on your credit report for six to seven years. For this reason, it is important to carefully consider walking away from your mortgage. It will impact your credit score, and can mean consequences from mortgage lenders. At Spergel, we have helped over 100,000 Canadians gain debt relief, and we can help you to rebuild your credit score too.
If you have more questions on ‘what happens if you walk away from a mortgage?’ and it is something you are considering, book a free consultation with Spergel. Although you may wish to walk away from your mortgage, it is important you understand your options and the consequences. If you are struggling to make your mortgage payments, Spergel can help. Speak to us today – you owe it to yourself.