t’s the last thing you want to do when you can’t make your mortgage or loan payment but it’s a common response for many Canadians — stick your head in the sand and ignore it.
“I think it’s a normal tendency of everybody to kind of ignore trouble if they can,” says Ray Leclair, vice-president, public affairs at the Lawyers’ Professional Indemnity Company.
A survey from LawPRO this week found 61% of Canadian adults do not know what options are available to them if they can’t pay, often landing themselves in a situation that could leave them in the bad books with their bank and at the mercy of creditors.
“I know when I was in practice, and I was in practice 25 years, when the clients came to see me we were months down that road,” says Mr. Leclair. “There were a number of issues to be dealt with at that point.”
Clients would usually show up at his door “when their back is against the wall” and a power of sale has already been started by the financial institution.
If you are in arrears — generally described as having missed three monthly payments — the bank can initiate a power of sale against you and put your property on the market. If your home sells for less than your loan, you’re still on the hook for any debt outstanding plus legal fees for 20 years.
“Banks get upset when you ignore them,” said Mr. Leclair, noting financial institutions are less likely to renegotiate your payment terms at this point.
Younger Canadians, those who are 18-34 and likely to be first-time buyers, seem to have the least understanding of what to do during a cash crunch as 74% said they had no idea what their options were if they couldn’t make a payment.
The survey was conducted from April 30 to May 1, 2014, online with 1,510 randomly selected Canadian adults. The margin of error was plus or minus 2.5 percentage points, 19 times out of 20.
Mr. Leclair says foreclosure, a court sponsored process, is something banks will try in a rising market like today because they can take your property and profit. You might have a $100,000 mortgage and they sell it for $150,000. Other creditors might also have to compete for that money, but chances are the excess won’t end up in your hands.
They take ownership of the asset and likely sell it, it’s their decision. In that situation, Mr. Leclair says, the debtor wants to stop that process. “But in that situation you have no response [to the bank] because you have not made the payments.”
If you get ahead of the foreclosure process, you can say “I’m okay with the sale but want a court sanctioned sale instead of foreclosure and you get more of say in what happens next.
Laura Parsons, Calgary area manager for mortgage specialists with Bank of Montreal, notes the issue of not paying is pretty rare. Canada Mortgage and Housing Corp. said last month only 0.35% of its portfolio is in arrears and BMO’s numbers are even lower.
But she says the issue does come up where people don’t pay and the last thing the bank wants to do is take their home. Most banks have provisions for scenarios where you might get into trouble.
Traditionally, BMO lets you skip a payment but it also has a provision to allow you to take a leave from your mortgage because of a change in circumstances.
“You can take that leave, say someone has a baby or someone gets cancer or something like that,” said Ms. Parsons, the key is you have to have enough equity in your home. Your mortgage cannot end up being larger than the original loan approval.
“We don’t want their house, we don’t want people in that situation. The sooner they know they are going to get in that situation, they should get into the bank,” she says.