Mortgage of 85% 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.

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 taking out a HELOC to pay for renovations or considering taking on a second mortgage in order to consolidate existing credit card and other debts.

Rising house prices cannot compensate for second or even third mortgages to refinance credit card debt or HELOC balances that increase when homeowners default or miss payments due to a sudden financial hardship like a job loss or increase in interest rates.

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 debt amounted to 85% of the net realizable value of their home.

Almost one in ten had negative equity in their home before factoring in selling costs and only 57% had positive equity once commissions and other closing costs were considered.

Piling on credit card debt

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.  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. If your renovation costs exceeded your budget, you may be forced to turn to higher cost unsecured debt to finish the project.  When this happens:

  • you may not be able to consolidate unexpected credit card debt.
  • you may not even be able to sell your home for enough to pay off the mortgage and start over. In fact, 43% of all insolvent homeowners had no equity value in their home at all.

In addition to owing 85% of the value of their home in mortgage debt, the average insolvent homeowner owed an additional $72,500 in unsecured debt. While a high ratio mortgage was the initial risk, it is this unsecured debt that becomes the final straw that leads to insolvency.

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

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.