If you are having trouble keeping up with mortgage payments and getting further into debt, can you pull the plug on your mortgage? In the US, this is what happened in 2008, causing that massive housing crash. Is this something that can happen in Canada?

Having a mortgage and being behind on payments is not the easiest thing in the world. Homeowners in this position often are ready to call it quits before they ever enter foreclosure or power of sale. So, what is the solution if you’re struggling to pay off your mortgage?

What Is Mortgage Shortfall?

When you are “underwater” with your mortgage, your home equity value is less than what you own on your mortgage. Unfortunately, that means you owe more than what your home is worth. In this situation, your lender is left with what is called a mortgage shortfall.

But, how does this happen? First, if the property market crashes and values come down since you last bought your home. Second, if you have taken an equity loan out against your home, which exceeds the value of your home when combined with the remaining mortgage balance. These are just the two main reasons why you would have negative equity in your home. With a mortgage shortfall, default insurance providers cover the difference.

What is Full Recourse?

You may wish to sell your home to avoid tumbling further into debt, but, you don’t have to. If you can keep up with your payments and hold on until the market improves, you can get a boost in property value – thus negating that shortfall!

However, if you are unable to maintain those payments, your lender may start initiating a power of sale. When selling a home with a mortgage shortfall, or foreclosure, you are still required to repay the difference between the balance on your mortgage and the sale’s proceeds. If you can’t pay this, the lender has the right to full recourse, meaning they can come after you for any money owed after you sell your home.

So Can You Walk Away in Canada?

Simply put, you cannot walk away from a loan in Canada. With Full Recourse, the lender has the legal right to be repaid and force borrowers to pay back mortgage shortfalls. The only way to walk away from a mortgage is to file a consumer proposal or bankruptcy.

What About Strategic Default?

With strategic default, the borrower outright stops paying back a mortgage loan. This negatively affects your credit report and score. Any strategic defaults will be a part of your credit report for up to seven years, so it’s crucial borrowers do the best they can to pay back mortgages and not ignore them. Plus, not paying back a mortgage in Canada can result in a lawsuit against you.

Conclusion

While surrendering to your debt may seem like the easiest way to deal with mortgage shortfall and avoid a power of sale/foreclosure, it is not ideal. While it may be tempting considering the stress mortgage shortfall creates, it’s important to be aware of the laws around mortgages.

If you are sinking into mortgage debt, don’t be afraid to seek help. Your mortgage lender, credit counsellor, or even your mortgage broker may be able to help you through the situation and find a solution to ease your financial stress and keep your home. The Mills team is here to help you with mortgage shortfall advice, so you can worry less about debt and get back on track financially.