Personal Finance

When to walk away from a mortgage?

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  • Jan 6th, 2011 9:58 pm
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Newbie
Jan 5, 2011
4 posts
calgary

When to walk away from a mortgage?

I bought an investment condo, which really didn't pan out.
I can still afford payments (in fact monthly cashflow from tenants covers entire mortgage (PIT)) but I'm worried about potential water pipes breaking, or interest rate rises.

To throw some numbers out there.
Purchases for 230.
Mortgage principle 175.
Saw one listed today for Current price 160k

I've been doing lots of reading online, about the benefits of walking away, but many pertain to american markets. Some say you have bad credit for 3 years then you're in good standing again.

What are my options?

1) Sell at a loss. Claim loss of capital gains for a few years (avoids having to buy rrsps)?
2) Suck it up, pay bare minimum into mortgage, hoping to have it pick up in 5 years, (sell at a smaller loss in the future)..
3) Suck it up, pay off mortgage asap. (Just feel like I'm throwing good money into bad with this option).
4) Default on payment. Foreclose property, take a big credit hit.

Any other thoughts?
If I do option 4, and a bank short sales, would they come after my other assets to cover the balance?

TIA
8 replies
Member
Mar 19, 2008
473 posts
22 upvotes
I may be wrong, but I thought you had to go bankrupt in Canada to "walk away" from a property. From everything you have said, it appears you are solvent, and the banks will take sell the house, get a judgement for their losses plus expenses, and take the money from you.

Someone please correct me if I'm wrong.
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Feb 15, 2008
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santabags wrote:
Jan 6th, 2011 5:37 pm
1) Sell at a loss. Claim loss of capital gains for a few years (avoids having to buy rrsps)?
You can only claim capital losses against capital gains, except if you die or go bankrupt, in which case, you can offset income with a capital loss.
2) Suck it up, pay bare minimum into mortgage, hoping to have it pick up in 5 years, (sell at a smaller loss in the future)..
For 'just' a $15k deficiency, probably one of your better options, unless your local market is oversaturated with a lot of supply. Are there a lot of vacant houses or not? You say Edmonton, right, there's not a lot of overbuilding there, is there?

3) Suck it up, pay off mortgage asap. (Just feel like I'm throwing good money into bad with this option).
You owe the debt, and you have to pay. Either way, the bank is getting their money. Short of bankruptcy, there is very likely no way out.
4) Default on payment. Foreclose property, take a big credit hit.
And get sued for the deficiency.
If I do option 4, and a bank short sales, would they come after my other assets to cover the balance?

Generally, yes. If you're in Alberta, and you put a >20% downpayment you may be able to walk away without making up the deficiency. Right now, you're in $15k negative equity, which isn't worth trashing your credit and your reputation over, that's for sure. If you truly have a non-recourse mortgage in Alberta, and you are still cash-flow positive, then why not just keep running the property? It really doesn't matter if you end up defaulting on $15k or $100k -- the hit to your credit record, in both circumstances, is equal. And who knows, maybe there will be some upside of government incentive programs or loan forgiveness programs in the future, who knows.... Especially when all of Canada is severely down the same path.

http://www.blakes.com/english/view_disc.asp?ID=1232
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
[OP]
Newbie
Jan 5, 2011
4 posts
calgary
Thank your Mark77. Interesting article you sent.
I didn't realize a credit hit would be the same on a 15k vs 100k.

If it were to happen though, how long before a bankruptcy record would be cleared from my name? 7 years?

I guess I was just shocked with the current price, and the loss of 70k that I had crazy thoughts in my head.
I'm going to minimize these payments and pay off my own mortgage.

The rental interest can be a write-off anyways.

Thanks again
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Dec 10, 2008
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OP, out of curiosity even though it's none of my business, when did you buy your property?
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Feb 15, 2008
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santabags wrote:
Jan 6th, 2011 6:51 pm
Thank your Mark77. Interesting article you sent.
I didn't realize a credit hit would be the same on a 15k vs 100k.

If it were to happen though, how long before a bankruptcy record would be cleared from my name? 7 years?
Never. You will always be require to disclose that you are a prior bankrupt, if asked on a loan application, or other disclosure where such is required (ie: an application to the Law Society, or APEGGA, for instance!). A bankruptcy stays on your record for life, although, it does fall off a credit report after 7 years.
I guess I was just shocked with the current price, and the loss of 70k that I had crazy thoughts in my head.
I'm going to minimize these payments and pay off my own mortgage.

The rental interest can be a write-off anyways.
Thanks again

Big risks you face are in the renewal of the loans, especially since they may ask you to disclose everything you have, and, when they see the negative equity in the one property, ask you for a higher interest rate. So getting rid of the property right now, and only taking a $15k hit, might be preferable. You really haven't given a lot of information on your overall finances to say, one way or the other. Also, coming up with an optimal plan requires many assumptions.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
Deal Fanatic
Jul 1, 2007
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Tell me this property is in Calgary and not Edmonton, or at least in a sh***y part of Edmonton or that you bought it at the absolute high in 2007. :-0

No "Jingle Mail" here in Canada, which is a good thing. It's why our banks are so much stronger than in the U.S. When you take out a loan to buy a house, you pay back that f'n loan. If a bank forces sale (happens more often than actual foreclosure) and there's debt remaining and you can prove you can't manage that debt, THEN you can declare bankruptcy.
Money Smarts Blog wrote:
Nov 29th, 2010 11:18 am
I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
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Thalo wrote:
Jan 6th, 2011 7:49 pm
No "Jingle Mail" here in Canada, which is a good thing. It's why our banks are so much stronger than in the U.S. When you take out a loan to buy a house, you pay back that f'n loan. If a bank forces sale (happens more often than actual foreclosure) and there's debt remaining and you can prove you can't manage that debt, THEN you can declare bankruptcy.

That's not quite true for some loans in Alberta. See that Blakes commentary above.

What happens on renewal could be interesting though. Bank will likely send out a letter:

"Dear Mr. X, Please find enclosed an offer for a renewal at <posted rate>."

OP could reply,

"Dear Bank, I am willing to renew, but only at the best available rate of <posted rate - 1.5%>. Otherwise, your recourse is limited to foreclosure on the property since this is a non-recourse loan."

Now, the bank very likely sold the loan into a MBS trust, so the bank isn't on the hook if it defaults, the MBS trust is.

So what ends up happening???

Who really has the upper hand?

Keep in mind that rent deflation is likely going to occur as well throughout this, so, at some point, the cash flow won't even be positive for the owner (borrower). And as the OP pointed out, other expenses will start to creep up.

As I've stated in the other threads repeatedely, home owners are still going to be, in the long run, losers here. But the inflation that ensues will certainly make huge winners out of bank stockowners and commodity stock owners.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
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Feb 15, 2005
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mrbeachman wrote:
Jan 6th, 2011 6:54 pm
OP, out of curiosity even though it's none of my business, when did you buy your property?
Thalo wrote:
Jan 6th, 2011 7:49 pm
Tell me this property is in Calgary and not Edmonton, or at least in a sh***y part of Edmonton or that you bought it at the absolute high in 2007. :-0
230k in Edmonton would make this a lower-end condo, even though it was probably advertised as a luxury condo. My guess would be that it was built by Landmark, VPI or Park Place developments. There are lots of these 230k condos in the South side, Western edge of downtown and the North side.

Some of the buildings are exceptionally crappy. There have been deficiencies ranging from structural deficiencies to poor materials and workmanship. There have been many horror stories in the news about how poorly constructed some of these buildings are. I've seen stories of $1,000,000 repairs to 16 unit condos to $7000 frozen sewage lines. Buying a new construction condo in Alberta is pretty much a bad idea.
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