6 options if you can't afford your mortgage

Contact your mortgage lender

If you’re worried you cannot make a mortgage payment, contact your lender right away. They don’t want you to default, so they’ll likely present you with options to avoid any path that leads to default — and losing your home. Examples of help you can expect from your mortgage lender include allowing you to skip a payment or renegotiate your mortgage terms so your monthly payments are more affordable.

That said, don't expect your lender to forgive any of your mortgage loan debt. If your lender authorizes you to skip any payments, this money continues to be included in your outstanding debt and still continues to incur interest payments.

Reach out to mortgage insurance providers

Another option is to reach out to a mortgage insurance provider.

Canada Mortgage and Housing Corporation (CMHC) and other mortgage insurance providers, Sagen (formerly Genworth Canada) and Canada Guaranty, are the backstop for mortgage defaults in Canada. As insurance providers to banks and mortgage lenders, these mortgage insurance providers can offer homeowners struggling to pay their mortgage with potential solutions to make payments more affordable.

Keep in mind, these insurers work with lenders that offer insured mortgages. This means that homeowners with lots of equity in their home — you owe quite a bit less than what your home is worth — may not find help with these mortgage insurance providers.

Still, if you are at risk of missing payments, it never hurts to contact your mortgage insurance provider. At times, these providers can work with your lender to help you defer payments and facilitate other options. CMHC also provides lenders with default management tools to help homeowners avoid foreclosure.

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Extend your amortization

Another option is to extend your amortization. Traditionally, when people renew their mortgage, they lower their amortization (the length of time it takes to pay off the mortgage). For instance, if you bought a home you probably started with a home loan on a 25-year amortization schedule. Five years later, you renew your mortgage and the amortization drops to 20 years.

With interest rates higher reducing the amortization on your home loan may not be beneficial for struggling mortgage-holders. Instead, extending your amortization schedule may make more sense because it will lower your monthly payments — with the intent of making your mortgage affordable. The caveat here is that a longer amortization does result in more interest charges, in the long run, but if you’re worried about your monthly bills today, extending amortization to lower monthly mortgage payments is a viable solution to consider.

ALERT: The recent mortgage changes now means that lenders have more options to extend the length of your mortgage amortization for more than 25 years. Prior to this, borrowers could only find longer amortization periods with mono-lenders (lenders that specialize in mortgages), through private lenders — and usually for an additional fee.

Earn money using your home

Another option, if you’re struggling to pay the mortgage, is to find ways to generate more cash flow. This extra money can help you make your mortgage payments and even provide a bit extra to help pay down other debts.

One obvious option is to rent out a portion of your home. This can include finding a tenant or using short-term rental platforms, like Airbnb, to help increase cash flow on a monthly basis. Another option is to host foreign exchange students. These arrangements do require some prep work — applications and interviews with schools or associations — but can offer steady income throughout the school year.

Finally, you could consider renting your whole home to offset the costs of your mortgage. You would still need a place to live, which could involve paying rent. That said, renting out your home can involve other expenses, including maintenance or repairs, and taxes. Also, you will have to pay tax on the rental income; the upside is that you can also claim expenses incurred from this income in order to offset any taxes owed. Just be sure that understand the implications of renting out your home. For instance, if you rent out your home to a long-term tenant this would make it impossible for you to live in your home — and change the status of the property from principal residence to rental property (and this change has tax implications when you eventually sell).

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Refinance and consider a shorter-term mortgage

Some lenders offer fixed-rate mortgages for as few as six months. Most offer short-term mortgages ranging from one to three years. The idea behind a shorter term is to use this shorter-term to minimize the impact of higher interest rates. If you think rates will drop in the near-future, a shorter-term mortgage can help bridge the gap between now and when mortgage rates may be lower — and help you avoid paying fees and costs associated with breaking a mortgage.

Beware of cost of breaking mortgage

Many variable-rate mortgage holders have already been pursuing a mortgage refinance option. By breaking your mortgage and opting for lower interest rates your mortgage payments become more manageable. One reason why breaking a mortgage is feasible, when you have a variable-rate mortgage, is because the penalty you pay to break that loan contract is the equivalent of three months interest. That means if your monthly mortgage payment was $2,500 and approximately half of that payment is the interest portion, then the penalty to break that mortgage is less than $4,000 (or $1,250 x 3 = $3,750).

Unfortunately, this fairly cheap method of breaking a mortgage does not apply to homeowners with a fixed-rate mortgage. This penalty is often calculated using the interest rate differential (IRD) or three months interest; whatever is higher. (NOTE: Almost always the IRD is higher, often by tens-of-thousands in penalty fees.)

The IRD can be expensive since it’s based on the time left on your mortgage term, plus the difference between your original mortgage interest rate and current interest rates on a similar mortgage.

Keep in mind, breaking any mortgage insurs a penalty as well as fees. Administration fees, appraisal fees and discharge fees can add to the cost.

That doesn't mean breaking your fixed-rate mortgage isn't an option, it just means you really need to do the math to make sure you come out ahead.

For instance, if breaking your fixed-rate mortgage allows you to extend your amortization and roll high-interest credit card debt into the debt — effectively lowering your monthly debt payments to a more manageable amount — then breaking a fixed-rate mortgage could be a good idea.

Breaking a mortgage vs blend-and-extend

Many lenders do offer blend-and-extend options, which typically do not have penalties, and involve blending your current rate with a lower fixed rate, while extending the term. As well, you can often roll high interest debt into the mortgage, providing you have the equity.

If you are considering breaking your variable or fixed mortgage, ask your lender or your mortgage broker what penalties and fees you will need to pay. Then talk to your current lender about blend-and-extend options or other ways to keep your mortgage contract, while making payments more affordable.

Sell your home, a last resort

If the monthly payments are keeping you up at night, or you simply can’t afford to keep paying your mortgage, it’s might be time to cut your losses and sell. In an ideal world, you would have some equity, allowing you to walk away with a bit of profit. That said, property values can drop and you need to be sure you don't owe more than your home is worth. If this happens, you might be on the hook to pay the difference between the sale price of your home and what you owe your lender — an extra, out-of-pocket cost.

Bottom line

The struggle is indeed real these days for many Canadians with mortgages, but relief is likely on the horizon with interest rates expected to fall over the next few years. That said, nothing is guaranteed. But individuals can start planning now to understand their options and make decisions that best suit their needs.

— with files from Barry Choi and Romana King

Sources

1. CMHC: Resources page

2. CMHC: Tool selector