Mortgage of 90% Or More A Bankruptcy Risk

Posted in Debt Help
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

mortgages-and-bankruptcy-post-updatedWithout the ability to borrow with a mortgage few of us would be able to buy a home.  That’s why mortgages are great, but only to a point.  It is possible to have too much mortgage.

Avoid A High Ratio Mortgage

A mortgage is considered a high ratio mortgage when you have less than a 20% deposit or down payment when you purchase your home. Take on a high ratio mortgage and you have to pay mortgage insurance through a mortgage insurer such as Canada Mortgage and Housing Corporation (CMHC), Genworth Canada or Canada Guaranty.

Mortgage insurance is not the only potential cost of a high ratio mortgage. A detailed review of our Joe Debtor insolvency study found that 9 in 10 insolvent homeowners carried a high ratio mortgage at the time of their insolvency. The average mortgage amounted to 92% of the net realizable value of their home.

The danger of a high ratio mortgage is that it can be the trigger point for filing bankruptcy. If you have little or no equity in your home you have no room to maneuver. You may not even be able to sell your home for enough to pay off the mortgage and start over. In fact, 64% of all insolvent homeowners had no equity value in their home at all. If you can’t or don’t want to sell, you make do by using your credit cards to pay your living expenses so you can keep up with your mortgage payments.

When You Can’t Pay Your Mortgage

While it may not be surprising to find that insolvent homeowners have little, or no, equity in their home at the time of filing, it may surprise you to know that most do not lose their home.

Mortgage arrears? See our slideshare on your financial options

In addition to owing 92% of the value of their home in mortgage debt, the average insolvent homeowner owed an additional $73,500 in unsecured debt. While a high ratio mortgage was the initial risk, it is this unsecured debt that becomes the trigger.

The risk of a high ratio mortgage to your financial stability doesn’t just apply when purchasing a home. It is also a factor to keep in mind when considering taking on a second mortgage in order to consolidate existing credit card and other debts.

The better solution may be to clear up outstanding unsecured debts through bankruptcy or a consumer proposal. Filing bankruptcy or making a settlement arrangement with your creditors will eliminate your unsecured debt payments, improving your cash flow. The trick however is to work hard to put any additional payments you can towards your high-ratio mortgage and reduce  the balance to a more manageable level as fast as  you can.

If you are struggling with mortgage payments and other unsecured debts, contact us today to talk about your options to put your finances back in balance.