If you’ve lost your job, one of the first things you do after working through your emotions (cry, get mad, drink your friend’s vodka) is to reduce your spending while you look for another job. Reducing your discretionary spending make sense — vacations and dinners out can wait — but what about non-discretionary spending like a mortgage? You may have lost your job but that biweekly payment is still there and you don’t want to lose your home as well by defaulting on payments.
When I faced that situation a few years ago after losing my journalism job, I called the bank, explained the situation and got my biweekly payment reduced. It helped that I had a variable rate and was paying more than I needed but for those who might have a fixed rate, what can you do after you’ve tapped your emergency fund, registered and non-registered savings, parents and friends?
“It’s the advice you hope you never have to use,” says Elan Weintraub, a director and mortgage broker at Mortgage Outlet. While he says that every lender has their own policy about what to do in case of job loss, there are certain things you can do, depending on your financial situation.
If you don’t want to rent or sell your home, there are other options that can tide you over while you look for another job.
“The simplest answer is to refinance,” says Weintraub, “That way you can extend the amortization and lower the monthly payments.” The problem, he says, that apart from facing penalties from refinancing is that banks aren’t that interested in refinancing, especially if you’ve lost your job, which can affect your stress test. “Really, from the bank's point of view, they’re saying, ‘You promised me $2,000 a month for the next five years. I really don't want to talk to you in the next five years.”
Going interest only
Thanks to new rules including the stress test, interest-only flex mortgages have made a return with the goal of reducing monthly carrying costs. You won’t be paying off the principal and will be paying a lot of interest, but if you’re between jobs, it’s about not defaulting on bills until you’re back on your feet.
Some financial institutions like TD offer a one-time skip the payment option which can be used on your mortgage payments. It does come with some repercussions. While you can skip a payment, the interest still has to be paid. Since most payments are blended, a combination of principal and interest, the interest is added back on to the total mortgage balance.
Tap your line of credit
No one wants to pile on more debt just when you’ve lost your income but depending on the interest rate, using your line of credit to pay your mortgage can be a short-term option. Just pay it down as quickly as possible when you get a new job.
Most Canadians aren’t aware of what to do with their mortgage in the case of job loss and when it happens, panic can set in, you leave it too late and one day the bank is knocking on your door, figuratively speaking. Having a plan in place can not only reduce stress but can keep a roof over your head while you focus on the important part of getting a new (and better!) job.