There comes a time in the lives of many Canadian homeowners when they look at their bank account and see that the amount is less than what’s needed to cover their mortgage payment. It could happen to you, and what you do next could make the difference between keeping your home or losing it – and destroying your credit in the process.
Skipped payments: how do they work?
If you can’t make a mortgage payment, call your lender and see what options are available to you. Some lenders offer a skip-a-payment feature as part of a mortgage product, which may have no penalties – or at least less severe penalties – in the event that you happen to miss a mortgage payment. But beware, because there can be significant repercussions to using this feature. First of all, missing a mortgage payment doesn’t excuse you from paying the interest for that month. Most mortgage payments are blended payments, which means that you’re paying down both the principal and interest in that one payment (the amount that goes toward your principal is less than the interest amount at the start of the life of your mortgage, but it increases as the years go on). Because of the blended payment structure, if you miss a payment, the part of the payment that is interest is still applied to your balance, which is called interest capitalization. Some skip-a-payment features don’t have fees, but with others, you’ll have to pay for the privilege. Another thing to watch out for is that if your mortgage doesn’t have the skip-a-payment feature, then you will have a penalty associated with the missed payment itself. And even if you make the scheduled payment on time the following month, that payment isn’t considered on time for that particular month; it’s considered a late payment for the previous month missed. And so on and so on that every payment you make will be a late payment until you make a double payment, essentially settling your balance. These are called rolling lates. Depending on the circumstances of your particular mortgage, you will end up owing more money in the long run, and would’ve been better off borrowing the money from a friend or family member for a short period of time, if at all possible.
If you’re finding yourself in a situation where you’re consistently unable to make mortgage payments, there are some things that you can try in order to increase your cash flow, such as renting out part of your home or converting an area like a basement or detached studio space into a rental suite. But let’s say that your situation isn’t an issue of cash flow and is the result of more permanent change, such as a loss of income due to injury or disability, you’re unable to sell your home for whatever reason, or you’ve already fallen far behind on mortgage payments. Once you’ve fallen behind on your payments, your mortgage lender is entitled to start the process of seizing your home.
Homes in foreclosure can be sold in different ways, depending on the province where the home is located. One method is a Judicial Foreclosure, also known as a Judicial Sale, a process in which a lender has to petition the court in order to sell a property whose homeowner has defaulted on the mortgage. In the case of a Judicial Foreclosure, the lender actually takes ownership of the property and can sell it without any obligation in terms of its re-sale price to the former owner. The involvement of the court system means that Judicial Foreclosures can take several months to be finalized. The Judicial Foreclosure method is favoured in British Columbia and Alberta, and also used in Saskatchewan, Manitoba, Nova Scotia, and Quebec.
Another method of selling a home in foreclosure is Power of Sale, which means that the lender can sell the property outright, and doesn’t need permission from the court. This process can start as soon as 15 days after the mortgage is in default and the lender is required to give the homeowner a 35 day notice period of the intent to sell the property. Power of Sale proceedings can have a homeowner out of the house within a couple of months, although it would be unusual for action to be taken that quickly. The lender is paid with the proceeds from the sale of the home, and the homeowner gets the difference if there’s any money left after any associated fees. Power of Sale is almost always used in Ontario, and is preferred in New Brunswick, Newfoundland and Labrador, and Prince Edward Island.
Unlike foreclosures in the U.S., the lender has to attempt to get a fair price from the sale of the home, which is why foreclosure homes aren’t as cheap to buy in Canada as they are in the States. If you lose your home and the sale of the home isn’t enough to cover your mortgage debt, you still can’t just walk away from it. You are responsible for the remaining debt to the lender. Even if you have mortgage insurance for the property, the lender can make a claim on the policy and the mortgage insurer will pay the lender, but you’re still responsible for any balance remaining to the insurer.
Keep in mind, however, that foreclosure is a very last resort. Lenders aren’t in the business of selling houses, nor do they want to be. Court processes and legal proceedings take money as well as time, and they would rather not deal with it if they don’t have to do so. It may be hard to admit that you can’t pay your mortgage, but don’t ignore it and hope it will go away. Lenders and mortgage insurers have programs in place to facilitate alternative arrangements.
Most homeowners don’t know that mortgage insurance protects you as well as the lender. If you bought your home with less than 20 per cent for a down payment, then you would have been required to get mortgage insurance, which protects your lender in the event that you default on your mortgage. But all of the three main providers of mortgage insurance in Canada also have programs that homeowners can take advantage of if they think they’ll fall behind with mortgage payments. Genworth Canada has a Homeowner Assistance Program
that is designed to help homeowners who are experiencing temporary financial difficulties work with the insurer to establish alternative arrangements to help homeowners stay in their homes. Canada Guaranty has a Homeownership Solutions Program
, in which a member of their Loss Management team helps the lender find ways for borrowers to keep their homes, including enacting solutions such as reducing their mortgage interest rate to reflect current interest rates if it’s lower, extending the current mortgage term and/or extending the amortization period. Canada Mortgage and Housing Corporation
(CMHC) also provides tools to find a solutions to help you with your mortgage payments, including converting a variable interest rate mortgage to a fixed interest rate mortgage in order to protect you from a sudden interest rate increase should one occur, offering a temporary short-term payment deferral, adding any missed payments to the mortgage balance and spreading them over the remaining mortgage repayment period, and other alternatives to resolve or avoid mortgage payment default.
If you think you’re going to be unable to make a mortgage payment, call your lender. You might not want to face the reality of not being able to afford your mortgage, but it can get away from you quickly if you’re not careful, costing you much more than a missed payment.
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