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 that. For example, they may allow you to skip a payment, or renegotiate your mortgage terms so you can make monthly payments.

That said, keep in mind that your lender won’t forgive any of your debt. Any skipped payments will be deferred until later, while charging you additional interest for the privilege.

Canada Mortgage and Housing Corporation (CMHC) and other mortgage insurance providers, Sagen (formerly Genworth Canada) and Canada Guaranty, are the backstop for defaults in Canada, and may also offer solutions. These insurers provide coverage for lenders if homeowners, who have put less than 20% as a downpayment on their home, default. If you are at risk of missing payment, it’s also worth contacting your mortgage insurance provider; they can work with your lender to help you defer payments and facilitate other options¹. CMHC also provides lenders with default management² tools to help homeowners avoid foreclosure.

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Extend your amortization

One of those measures involves extending your amortization. Traditionally, when people renew their mortgage, they lower their amortization (the length of time for paying off the house) at the same time. But with interest rates now higher, a lower amortization may not be beneficial for struggling mortgage-holders. Instead, extending your amortization schedule may make more sense because it will lower monthly payments. A longer amortization does result in more interest charges in the long run, but if you’re worried about your monthly bills today, it is a solution to consider.

Some mortgage insurance providers allow private lenders to extend the mortgage term beyond 25 years for some borrowers, in some instances to 40 years. As well, 30-year amortizations are offered by Canada’s big banks for existing clients—who are uninsured (more than 20% equity). More recently, the government announced 30-year amortizations will soon be available to insured, first-time buyers seeking to purchase a newly built home.

Earn money using your home

If you’re struggling to pay the mortgage, one way to generate more cash flow to pay it is to rent out part of your home. Short-term rental platforms like Airbnb may provide additional, albeit variable income, or more long-term rental arrangements could increase cash flow on a monthly basis. Some households also host foreign exchange students to provide steady income throughout the school year. You could also 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. You may have to pay tax on the rental income, after deductions. That also means that your home would no longer be your principal residence. Thus, it would not be exempt from taxes on applicable capital gains for those times you rent it when you do eventually sell.

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Refinance and consider a shorter-term mortgage

The Bank of Canada may have stopped hiking interest rates and is signaling it may begin easing the overnight interest rates next. This is good news for if you’re facing renewal soon, or looking to refinance, and interest rates on five-year, fixed-rate mortgages have dipped several basis points below 5%. If you’re concerned about locking in for five-years today only to see interest rates fall significantly over your new term, consider going with a shorter term.

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 hoping that, upon renewal, interest rates will be lower. Ideally, you want to renew at the end of the term opposed to breaking the mortgage to refinance at a more affordable rate because refinancing often involves penalties. These can result in longer repayment of the mortgage and more interest charges.

Beware of cost of breaking mortgage

Many variable-rate mortgage holders have already been pursuing refinances, breaking their mortgage, opting for lower interest rates of fixed-rate mortgages. Other homeowners with fixed-rate may also be considering refinancing to roll in high-interest credit card debt to reduce their overall debt payment costs.

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. Otherwise, breaking a mortgage to refinance generally involves a penalty. This penalty is often calculated using the interest rate differential (IRD) or three months interest; whatever is higher.

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.

Variable-rate mortgages typically charge only three months interest--though this isn’t the only fee you might face. Administration fees, appraisal fees and discharge fees can add to the cost.

If you are considering breaking your variable or fixed mortgage, ask your lender or your mortgage broker what penalties and fees they charge. You can also use an online mortgage pre-payment calculator to determine how much it would cost.

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 likely time to sell. In an ideal world, you would have some equity, allowing you to walk away with a bit of profit. That said, property values have dropped recently, and you might owe more than your home’s worth.

If this happens, you may need to pay the difference to your lender out of pocket. This is obviously a painful scenario or any homeowner, but the short-term pain might be better than any long-term solution available.

The last word

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 file from Joel Schlesinger

Sources

1 CMHC resources page

2 CMHC tool selector