We know that your home is probably your biggest asset and while you may be struggling to keep up with your mortgage payments you may want to keep your home no matter what.
What’s the Underlying Issue
Your first decision is whether or not you want to keep your home. A review of your budget will tell you if it is your mortgage payment that is causing your financial problems or if other spending and debt payments are the real problem.
A general rule of thumb is to keep your housing costs below 30% of your income. If your housing related payments are pushing 50% or more, you may need to consider downsizing.
If however you are regularly missing your mortgage payments, because of other debt, then you have more options to explore.
Financial Options If Other Debt is the Problem
- Consider selling and downsizing your home. You could also rent for a period of time. If your only financial problem is your mortgage payments because they just won’t fit into your budget, and you can’t increase your income, then selling your home may be your best financial choice. If you can sell your home for more than the mortgage, you can use the equity for a down payment on a smaller home or to cover your rent for a period of time. If you have a shortfall after selling your home, your lender will pursue you for the difference. This shortfall is considered an unsecured debt and can be included in a bankruptcy or consumer proposal.
- Refinance other debt with a second mortgage. If the cause of your financial problems are a few unsecured high interest debts, like credit cards, and you have positive equity in your home, you may want to consider refinancing with a second mortgage. A word of caution however. Placing yourself in a high-ratio mortgage situation is a significant risk factor for bankruptcy. Almost all of our clients who own a home at the time they filed for bankruptcy had a high-ratio mortgage. Consolidating other debt with a loan, secured by your home, is only a good alternative if you deal with all of your debts and can continue to afford to make all of the monthly payments. You do not want to choose a solution that will only put your home more at risk.
- Filing bankruptcy does not mean you automatically lose your home. By law, your creditors are entitled to the equivalent of the equity value remaining in your home, after deducting reasonable selling costs. It is possible to keep your home and continue with your mortgage when you declare bankruptcy by ‘paying’ the equivalent equity value to your trustee as part of your bankruptcy payments.
- Make a proposal to your creditors. If the equity in your home is significant, this can result in fairly large monthly bankruptcy payments which may not fit within your budget. A viable option is to file a consumer proposal instead. With a consumer proposal, you calculate how much you would have paid in a bankruptcy, and offer slightly more to your creditors in the form of a proposal. The advantage is that you can spread those payments out over a longer period of time (up to 5 years). Alternatively you can borrow against the equity value in your home and make a lump sum payment offer. Again however we caution you to ensure that you are not putting your home at risk by taking on too large a mortgage.