Things happen, and sometimes, even our best-laid plans go sideways. Canadians have faced this hard fact recently as they face rising interest rates. Mortgage rates in Canada have been on the rise, and with them, mortgage payments. Some Canadians are currently paying up to $1,400 more monthly for their mortgage.
This jump happened because the Bank of Canada (BOC) started raising interest rates to combat inflation, and the impact spread to mortgage rates. Canadians with variable interest rates saw more of their payment going toward servicing the interest portion of their loans, and in many cases, the payment itself increased.
Even Canadians with fixed-rate mortgages set to renew soon were surprised to find their monthly mortgage payment increasing by hundreds of dollars. This increase in monthly payments has started to wreak havoc on budgets across the country.
While you may be able to weather the storm of rising mortgage costs for a short period, you might also be finding yourself exhausting your emergency savings and wondering, if I can’t pay my mortgage, what happens?
This is a question that many Canadians are asking themselves as the new year approaches. Since the BOC is showing no signs of stopping its rate-hiking campaign, now is the time to plan how you’ll afford a higher mortgage payment.
First, don’t panic. Rising mortgage payments are cause for concern, but as far as what happens if you can’t pay your mortgage in Canada? There are many options available for anyone worried about affording their mortgage.
How to Reduce Your Mortgage Payment
If you can’t afford your mortgage, one of the first steps is to look for ways to reduce your monthly payment. To do that, consider the main drivers of the cost of your mortgage:
- Interest rate: the cost of borrowing from your lender
- Amortization: the time left to pay off the loan
- Principal: the remaining balance on your mortgage
Each of these variables represents an opportunity to lower the monthly cost of your mortgage.
Lower Your Mortgage Rate by Switching Lenders
If it feels like your mortgage payment is the highest it’s been since purchasing your home, you might be right. Mortgage interest rates are much higher today than in several years. According to ratehub.ca, mortgage interest rates haven’t matched today’s rates since 2009.
While mortgage rates are much higher today, you may not have the lowest rate available. If you’ve always signed your renewal notice with your lender without bothering to shop around for the lowest mortgage rate, then there may be an opportunity to lower the rate on your mortgage. Typically, lenders won’t offer the best rate for automatic renewals, so it’s a good idea to shop around with other lenders to determine if you qualify for a lower rate elsewhere. A mortgage broker can walk you through this process.
While a better mortgage rate may be just a few tenths of a percentage point lower, this drop can make a substantial difference in your mortgage payment.
For example, if you have a $500,000 mortgage at 4.69% amortized over 20 years and find a different lender offering 4.25%, your mortgage payment will drop from $3,214.76 per month to $3,096.17.
Switching to a new lender means you’ll need to take out a new mortgage with a new lender and pay off your old one. If you switch lenders before your mortgage term is up, you’ll likely incur fees (known as break fees). Sometimes, the fees can be very hefty, especially if your mortgage term is new. Make sure to double-check with your lender what the fees would be so there are no surprises.
Extend Your Repayment Period
Lowering your mortgage interest rate by switching lenders is one piece of the puzzle regarding lowering your monthly mortgage payment. But if your mortgage interest rate is already very competitive, there might not be much money to be saved.
In that case, another variable that affects your monthly mortgage payment is the total length of your loan, also known as the amortization period.
Increasing the length of your loan will lower your monthly payment by spreading the payback over a longer period.
This method has two drawbacks:
- Your mortgage will take longer to pay off
- You’ll pay more interest over the life of the loan
For example, if you currently have 15 years left on a $500,000 mortgage at 5% interest and you increase the amortization to 25 years, your monthly payment will drop from $3,953.97 to $2,922.95 – a difference of over $1,000 per month!
That said, the interest that you’ll pay also changes. Over a 15-year amortization period, you’ll pay $211,714.26 in interest. If you increase your amortization to 25 years, you’ll pay $376,885.06 in interest.
If you have urgent affordability issues, these two tradeoffs are worth it.
So, just how long can you make your loan? In Canada, some regulations determine the maximum amortization period for mortgages:
- For homeowners with less than 20% equity in their home, your maximum amortization is 25 years
- For homeowners with more than 20% equity, your maximum amortization is 30 years
Extending your mortgage’s amortization will require you to refinance your mortgage.
Make a Lump Sum Payment
Finally, the third variable that impacts your monthly mortgage payment is the outstanding balance on your loan. Put simply, the bigger your mortgage, the higher your monthly payment. You can reduce the balance of your mortgage by making a lump sum payment, also known as a prepayment.
Most mortgage products allow you to make one of two types of prepayments (these are called your prepayment privileges):
- Add to your monthly payment: You can arrange for your lender to increase your monthly payment by 5-20%
- Make a year-end lump sum payment: You can make a large cash payment totalling 5%-20% of your outstanding balance
Making a large lump sum payment on your mortgage will help reduce your monthly payment when your mortgage renews.
What Happens if You Can’t Pay Your Mortgage?
Suppose you can’t pay your mortgage, and you cannot get a lower interest rate. You can’t extend your amortization any further, and you’re running out of cash reserves. This situation may seem dire, but it’s still not time to panic. If you can’t pay your mortgage, you still have options.
Short-Term Mortgage Deferral
If you can’t pay your mortgage this month, you must take evasive action now. Don’t let your lender try and take your monthly payment from your account only to find insufficient funds available. Letting your mortgage become delinquent can lead to penalties and will immediately alert your lender to trouble.
Instead, consider taking advantage of skip-a-payment or short-term mortgage deferrals available with your mortgage product. The way these tools usually work is to allow you to skip one mortgage payment per calendar year and add that payment to the end of your mortgage amortization. There is usually no penalty for using this tool; it will give you enough breathing room to plan your next move.
Get a Roommate
If extending your amortization or shopping around for a lower interest rate isn’t enough to make your mortgage payments affordable, consider using the existing space in your home to generate enough income to offset the increased costs.
An excellent way to tap into revenue with your home is to rent an unused room to a tenant. Depending on where you live, renting a spare room could add hundreds of dollars into your pocket each month – enough to make a dent in the rising costs of homeownership.
Move and Rent It Out
If you can’t afford to pay your mortgage but live close to relatives or friends who can accommodate you, consider moving in with them and renting your home. The rent that you collect would help offset your rising mortgage costs. This option has the added complication of becoming a landlord, and you’ll need to find, screen, and manage tenants. That said, renting your home can be a reasonable short-term solution if you don’t want to sell and plan to move back in after your financial situation changes or mortgage rates drop.
Sell Your Home
Finally, selling your home isn’t an ideal solution, but if you can’t afford your mortgage payments and none of the options above seem reasonable, selling and downsizing to either a rental or a smaller home might be the right option.
Before listing your home for sale, it’s essential to do your research. For example, has your home decreased in value since you purchased it? If so, you may not have enough equity to discharge the mortgage.
Additionally, breaking your mortgage term may also come with fees. An experienced real estate agent and mortgage broker can discuss your options.
Can I Sell My House Before Paying Off the Mortgage?
Suppose you have a variable rate mortgage that has been steadily increasing, or your fixed rate mortgage is up for renewal soon, and the payments are unaffordable. In that case, it’s important to take evasive action before your mortgage becomes delinquent with your lender.
If you can’t pay your mortgage, what happens next is you’ll take various steps to avoid foreclosure on your home, from renegotiating your mortgage terms to bringing in a renter for a spare room or even selling and downsizing. While selling your home isn’t an ideal solution, you can do so while you still have a mortgage, and you can use the proceeds from the sale to pay off your mortgage.
Whatever steps you take, the important thing to remember is that you must take steps before your mortgage becomes delinquent. Otherwise, your credit score will be damaged, making executing the above steps more challenging.
