Divorce. Job loss. New baby. Unexpected things happen to everyone, but unfortunately we’re not always prepared to properly deal with them. For a homeowner, sudden changes to your finances can have major consequences if you start missing your mortgage payments.
I remember the first time I missed a credit card payment. I didn’t think it was a big deal. After all, it’s just one payment. That worked the first couple times, but eventually, things changed. I lost a huge chunk of my income and one missed payment turned to two and then three and I found myself struggling to make any sort of payment at all.
This situation is what lenders refer to as being in arrears. The Merriam-Webster english dictionary defines it as “the state of being behind in the discharge of obligations” which is a fancy way of saying “you haven’t been paying your debts”.
Your mortgage is the last thing you want to be missing payments on. A home is more than just a shelter or a potential source of income. More than anything else, a home is a responsibility and the mortgage is a big part of that. Despite the housing boom of the last several years, Canadians are actually doing pretty well to pay their mortgages as the Canadian Bankers Association(CBA) reports that the percentage of mortgages in arrears across the country was just 0.24% at the end of February. And even more surprisingly, Ontario and British Columbia, where housing prices are highest, have the lowest percentages of arrears to total mortgages.
Despite the low numbers, I’ve seen how easily first-time homeowners can suddenly find themselves in over their head. What can someone do if they temporarily can’t afford their payment?
I asked Toronto-based personal finance coach and educator Matthew Siwiec to help walk me through what steps a homeowner should take when their mortgage is in arrears.
How long before your mortgage goes into arrears
The CBA defines arrears as three or more months of missed payments, but that doesn’t mean that time frame applies to all mortgages, Siwiec told me.
“Well a lot of it’s based on the actual mortgage contract the person signs, and those vary by bank, but it’s typically two or three payments,” said Siwiec. “It also depends on the frequency of the payments. If you’re doing weekly payments, a couple missed weekly payments is going to be treated differently than missing two or three monthly payments.”
How you get out (and stay out) of arrears
1) Talk to your lender to explain your situation
As much as you might not want to have the awkward conversation with some bank rep you’ve never met, keeping communication open between you and your lender is the first step to getting things back on track.
“If you miss a couple payments, you can typically talk to someone there and maybe figure something out or delay things,” explains Siwiec. “The first thing that would typically be done is seeing if they can reduce the payment in any way.”
Your lender will try to work with you to find a solution. Not saying anything will make things worse. “Because if you start speaking to people, they’re going to try to at least figure out the situation and understand that you’re serious about it.”
2) Sort out your cash flow issue
Once you and your lender figure out a plan, your next step will be to make sure you can comfortably cover your payments going forward.
- Look for a lower rate (you can compare mortgage rates on our website here). Your current lender may be able to offer you a lower rate, but don’t forget to compare options anyway
- Increase your income. Maybe you need to pick up an extra shift or two, or maybe it’s time you started looking for a higher wage
- Keep an emergency fund. Give yourself breathing room by being able to cover the cost of your mortgage for several months even if you’re not working
- Consider making changes to your lifestyle that will make it easier to make your payments. Are you living beyond your means?
What mortgage lenders do if you fail to pay
A mortgage is a contract, and breaching its terms (AKA not paying it) can be considered by lenders as a breach of that contract. According to Siwiec, at this point, the lender has several options with some procedural differences in each jurisdiction.
- Foreclose title to the property
- Sell the property under the power of sale provisions in the contract
- Sue the borrower on the grounds of failure to meet the obligation to repay
- Take possession of the property, or put a tenant in the property to offset the debt
- If realty taxes or condominium fees are unpaid, pay the taxes or fees directly to the municipality or condominium corporation and add the amount paid to the principal of the loan
Your lender will notify you about steps that could be taken should you default on your loan. Any other titleholders will also be notified to give them the opportunity to get involved. Siwiec says lenders will typically go with one of two options: foreclosure and forced sale.
Foreclosure means suing the borrower for both possession of the property and payment of the debt. This is a long, drawn out process that involves going to court and leaving you with no money whatsoever if the lender sells the property. If your lender takes possession of the property, there’s still a period of time in which you can redeem the property by paying enough money.
Lenders may choose foreclosure when the value of the property is lower than the debt level and they’re willing to hold onto the property until its value recovers. Foreclosure puts pressure on the borrower to pay because it carries much more serious consequences.
Forced sale is when the lender sells the property without taking possession of it. It’s the preferred option for most lenders as it is relatively quick, does not involve the courts, and doesn’t incur the expense of taking the title to the property. It’s a good solution for the lender when the market value of the property is higher than the outstanding principal and interest owing on the mortgage.
This is a way better option for you, because even though you’re losing your home, you would be still get any money gained from the sale after all debts on the property are cleared.
How mortgage arrears impacts your finances
Mortgage arrears is the first step to wrecking your financial health. Many lenders report mortgages to credit bureaus and that means it’ll hurt your credit score. More importantly, falling behind on your mortgage payments puts you at risk of falling behind in other aspects of your finances, and that’ll put you further behind in life.
Even if it’s just a small percentage, you’re not the first person to miss a few payments on their home. The essential thing to remember if you’re in that situation is to keep an open line of communication with your lender, and if you’re having trouble with the monthly payments, don’t be afraid to look for a lower rate.