Relief is coming for homeowners. The Bank of Canada (BoC) recently pulled the trigger on a quarter-point rate cut, lowering the policy rate from 5.00 per cent to 4.75 per cent. This decision lowered the yield of five-year government bonds, allowing some big banks to give their fixed mortgage rates a modest haircut. It might not be much now, but it could be the beginning of lower mortgage rates, should inflation continue heading toward the central bank’s two per cent target.
However, as new research from the Bank of Canada has found, many homeowners have struggled in today’s high-rate climate, and it could take a while before many households dig themselves out of a financial hole. Despite the difficulty navigating through all the turbulence, families have been able to keep up with their payments and avert default.
While you might have felt perfectly capable of making mortgage payments when you bought your house, sometimes financial situations arise that affect your ability to make regular mortgage payments. This can have a huge negative impact on your credit score and can put your home in danger of being repossessed if you don’t take immediate action. Luckily, there are options that can give you time to turn your finances around.
Here’s what you should do if you cannot pay your mortgage.
What Happens If I Can’t Pay My Mortgage
Here are a few things you need to know if you cannot pay your mortgage:
Determine the Reason You Can’t Pay
People do not fall behind on mortgage payments on purpose. Rather, there is an underlying reason that they cannot afford to make their mortgage payments. Once you figure out why you can’t pay your mortgage, you can take steps to remedy the situation.
In some cases, short-term financial issues make it difficult to make mortgage payments. Falling behind on mortgage payments could occur due to loss of income, as many Canadians have experienced over the last few years. Sometimes, an emergency expense causes a budgetary shortage, forcing you to pick and choose what gets paid in a given month.
That said, long-term financial issues make it difficult to make mortgage payments. If you pay an excessive portion of your income, making you house poor, then you might be in constant danger of being unable to make your mortgage payments. Or your mortgage is an acceptable portion of your household bills, but you have an excessive amount of other debt like vehicle loans or credit card debt.
Whatever the reason for falling behind, if you can figure out the underlying cause, you can start working on correcting it.
Make Alternative Payment Arrangements
Regardless of why you cannot make your mortgage payment, once 15 days have passed, you will be charged a late fee. Those 15 days are a grace period, so if you pay your mortgage before the days have elapsed, you will typically not be charged any fees or penalties.
At this point, you have a few options for catching up:
- Short-term mortgage payment deferral – If you are dealing with a temporary setback, then deferring your mortgage for a set amount of time could be a good option. This allows you to repay the missed payments later, plus any interest accrued over the deferral period.
- Make reduced payments – A forbearance plan allows you to make reduced payments or sometimes no payments for a set amount of time. This is another good option if you are dealing with a temporary setback.
- Extend the original repayment period (amortization) – Extending the amortization period could lower your monthly mortgage payments and make them more affordable.
- Add the missed payments (arrears) to the mortgage balance – Your mortgage lender might be willing and able to add the missing payments to your mortgage balance and spread them out over the remainder of your mortgage period, thus increasing the mortgage amount for the rest of the term.
What If You Can’t Catch Up?
As previously noted, you will be charged a late fee once you have not made your mortgage payment after a little more than two weeks. After the 30-day mark, your loan will officially default. At this point, your lender will report your overdue payment to credit bureaus, which will begin to impact your credit score.
The foreclosure process will begin if 120 days have passed and you still have not made a mortgage payment or any alternative arrangements. When your home is foreclosed on, your mortgage lender will take possession of your home and remove you from the property. While the process varies by province, the ultimate goal is to sell the property and use the proceeds to pay off the remainder of the mortgage.
If the house sells for less than the remainder of the loan, you must pay the difference. This is called a deficiency judgment and requires additional legal action from your lender.
Although you might feel financially secure, sometimes unexpected situations arise, and you may ask, “What happens if I can’t pay my mortgage?” In this case, don’t wait until it is too late. If you have trouble, talk to your mortgage lender immediately to work out a plan. They are much more willing to help you if you approach them ahead of time rather than letting your mortgage default. If your finances are sound at the moment, then use the opportunity to build an emergency fund should you run into financial trouble in the future.
State of the Mortgage Market in Canada
Economists anticipate that the conventional five-year fixed-rate mortgage will continue heading toward the four per cent range. That is, if the Bank of Canada follows through on its monetary policy pivot and cuts interest rates a couple more times before the year is finished.
In the meantime, the financial wreckage from an environment of high interest rates and above-trend inflation has been left behind.
According to the central bank’s latest annual Financial Stability Report, median monthly payments are forecast to increase by as much as 60 per cent over the next few years as homeowners renew their mortgages. This challenge could pose a threat to the stability of Canada’s financial system, though households have been able to weather the storm as residential mortgage defaults have been below 0.5 per cent nationwide.
If more Canadians lose their jobs, the unemployment rate goes up, all of a sudden that stress, that vulnerability is really at risk of crystallizing.
“If more Canadians lose their jobs, the unemployment rate goes up, all of a sudden that stress, that vulnerability is really at risk of crystallizing,” Gov. Tiff Macklem told reporters at the June 2024 press conference about the report. “More households won’t be in a position to pay that mortgage, particularly given the larger reset. So, it is a vulnerability. And the point here is households and banks need to get ahead of that. We know what’s coming.”
Indeed, Bank of Canada staff economists asserted in a new paper that average monthly mortgage payments will be 17 per cent above 2022 levels in the next three years, which will weigh on households’ disposable income levels.
“At the peak, the average household with a mortgage will experience a 5 per cent decrease in its level of disposable income,” the researchers noted in an analytical note.
The good news? A new report from the Canada Mortgage and Housing Corporation (CMHC) found that mortgage debt climbed at its slowest pace in 23 years, even with sky-high borrowing costs. The bad news? This slowdown might be short-lived due to higher home prices and sales activity, says Tu Nguyen, an economist with RSM Canada.
“Once the Bank of Canada begins cutting rates, which is as early as next week, we will see mortgages growing again,” she said in an interview with CBC News ahead of the June BoC meeting.
CMHC data show that mortgage debt totalled $2.16 trillion in February, up 3.4 per cent from the same time a year ago.
