Personal Finance

Cheapest way to borrow money for selling home at a loss

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  • Aug 17th, 2020 6:08 pm
[OP]
Newbie
Jul 28, 2020
7 posts
4 upvotes

Cheapest way to borrow money for selling home at a loss

Hello everybody!

I am looking to sell my condo. There will be around $50k shortfall in current market to cover the mortgage, so I was wondering what vehicle would people recommend to finance that 50k?

My financial situation:
- $150k annual income, stable career
- 832 credit score
- $420k mortgage with First National
- no other debt
- $60k total credit limit across 3 credit cards (none of them ever carry a balance)
- $10k unsecured LOC from Scotiabank (they gave it to me without asking when I had a mortgage with them; never used)
- $100k in RRSP

My first thought was to get a loan/LOC secured against my RRSP, but apparently that's not allowed.

My second thought is to submit a bunch of applications for unsecured LOC and hopefully enough of them get approved to bring the total to 50k.

What other suggestions would people have?

Thank you.
22 replies
Member
Jun 6, 2014
300 posts
129 upvotes
Toronto, ON
LOC would have the lowest interest rate.
Deal Fanatic
Feb 4, 2010
6574 posts
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What about renting it out instead of selling at a loss? Is there any particular why you have to sell - your numbers indicate you can afford it?
Deal Expert
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Jan 27, 2004
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ONTARIO
hierophant wrote: What about renting it out instead of selling at a loss? Is there any particular why you have to sell - your numbers indicate you can afford it?
Could be the OP needs to relocate. Hard to manage rental from afar, and property management can be expensive.

Perhaps his area has a poor rental market. Even Toronto has a lagging rental market during covid.
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Dec 16, 2015
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Which condo is this? Is the value less than your mortgage?
To the moon
Member
Oct 11, 2013
217 posts
61 upvotes
Almost American
Hey OP,

Curious what market you're in that the property needs to be sold at a loss. Sign of more to come? Your best bet would be the LOC to cover and then sell. I would probably look at keeping it until it appreciates again if possible.
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Feb 25, 2018
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I think we are in period of deflation but in few more years it should rebound!
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Nov 2, 2013
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You're missing a lot of other transaction costs:

- Legal fees
- land transfer taxes (if applicable)
- odd associated costs of selling, such as staging, advertising, etc.
- RE agent commission
- mortgage penalties for breaking your term early

etc.

May be a lot more than $50K that you estimate.

Might be more worthwhile to just walk away from it and take the hit to your credit. Providing it is cost prohibitive to just treat it as a paper loss and hold onto it for a few more years, or whenever you expect the market to bounce back. Whether the gain is worth sacrificing 6-7 years of blemished credit, depends on if you expect to use your credit in the next 6 years for a purpose more than the $50K+ "hole" you walk away from.

I too was in a similar predicament, but more so to separating from a bad business partner, combined with the COVID-19 fallout. Restructured / wrote off about $100K of debt in return for sacrificing my credit for the next 6 years. In my case in the next 6 years, I didn't expect to use my credit to gain anything over that $100K, so it was worthwhile. I opted to keep my primary residence, even though I am down about $90,000 from 2017 market value - but more so because it is a roof over my head for at least a few more years, so the market value drop would not actually be realized anyway.
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[OP]
Newbie
Jul 28, 2020
7 posts
4 upvotes
Hey all!

Thank you for all the replies, and apologies for the delay in getting back.

The condo is in downtown Calgary, good area. It was assessed for $440k this year. I am optimistically hoping it will sell for $400k. I tried selling it last year for $460k with very little interest.

I considered renting it out, but I would be looking at about $1k negative cashflow per month. That's assuming it does rent at all - identical units in the same building have been sitting vacant for months. I also don't have high hopes for the future value of downtown condos - with the mass transition to work from home that covid is causing, everyone will move away. It just seems like putting good money after bad at this point.

Which is also why I want to get out asap - because of covid, my work is now work-from-home permanently, so as soon as covid passes, I am off to Mexico haha. My salary will go a long way there, and 50k debt doesn't seem so bad.

@FirstGear, that is a very interesting suggestion - I did seriously consider just cashing out and walking away. Since I am pretty much leaving the country for the time being, I have no use for my credit. I would be very curious to hear about the experience of a fellow Albertan with the restructuring / write-off, if you don't mind sharing. How did you keep your residence? Are you allowed to keep any assets after restructuring? I assumed you have to liquidate all assets when defaulting on mortgage, but you make it sound very transactional.
Deal Fanatic
Jan 21, 2014
6900 posts
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@qsdqsd One suggestion - wait until there is a vaccine for Covid-19 before going down to Mexico, because Covid is running wild there, they have the third highest number of deaths, just behind Brazil and U.S. and their number of new cases continue to climb at a record pace
[OP]
Newbie
Jul 28, 2020
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4 upvotes
@mkl38s yep that's the plan, I am just getting ready now, but not planning to actually travel until pandemic runs its course.
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Nov 2, 2013
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qsdqsd wrote: Hey all!

Thank you for all the replies, and apologies for the delay in getting back.

The condo is in downtown Calgary, good area. It was assessed for $440k this year. I am optimistically hoping it will sell for $400k. I tried selling it last year for $460k with very little interest.

I considered renting it out, but I would be looking at about $1k negative cashflow per month. That's assuming it does rent at all - identical units in the same building have been sitting vacant for months. I also don't have high hopes for the future value of downtown condos - with the mass transition to work from home that covid is causing, everyone will move away. It just seems like putting good money after bad at this point.

Which is also why I want to get out asap - because of covid, my work is now work-from-home permanently, so as soon as covid passes, I am off to Mexico haha. My salary will go a long way there, and 50k debt doesn't seem so bad.

@FirstGear, that is a very interesting suggestion - I did seriously consider just cashing out and walking away. Since I am pretty much leaving the country for the time being, I have no use for my credit. I would be very curious to hear about the experience of a fellow Albertan with the restructuring / write-off, if you don't mind sharing. How did you keep your residence? Are you allowed to keep any assets after restructuring? I assumed you have to liquidate all assets when defaulting on mortgage, but you make it sound very transactional.
Forgot to mention - usually debt restructuring is done to maximize the gain - so someone in your situation would take the opportunity to also write off other debts at the same time; to go "all in". Factoring in this, your gains may be well over the losses from just the losses on the property, depending on what else you have to dispose.

You can choose to keep your residence if you want. Debt restructuring can be customized, unless you're declaring a bankruptcy - where only property with $40,000 of equity or less, is exempt... though that sounds like your case anyway.

In my case my total gain was over $100,000 - but I kept my residence, and did not have to declare bankruptcy. My debts were not large enough to warrant an actual bankruptcy, and I wanted to go to law school in the near future. If I had disposed of it, it would had been closer to $150K+. My file was more complicated than most, but I basically took advantage of certain parts of the Bankruptcy and Insolvency Act, Income Tax Act, & IRFS reporting rules to propose to the creditors only 10 cents to the dollar - in a manner they were unlikely to object. To support this, I reduced my annual gross income from approx. $130K to just $30K net for 2018-2019, so even if my proposal did not get accepted, and I was "forced" into bankruptcy - the creditors would get $0. My Accounting (net) income was much lower than taxable income. I can write a book on my file but if you PM or email me I can share what's digestible.

There are usually 4 avenues of restructuring:
- bankruptcy
- division I or division II proposal (latter is "consumer proposal": basically playing chess and telling creditors, with a legally binding agreement: "im considering bankruptcy... but here's $X instead, which is more than what you'd get if I went bankrupt."
- OPD government program (government forces a settlement for debt without any interest charged, in return for blemished credit during the repayment period plus 2 years)
- debt settlement (negotiated settlement with each of your creditors, kind of like "settling outside court").

Alternatively, some walk away from certain debts, and force the creditors to take action (e.g. handing back the keys to the bank) - and then finally initiate one of the above to maximize gains. If debt is unsecured, some debt gets "erased" this way when it is cost prohibitive to pursue it... or delayed for months or years before anything happens, such as underwater mortgages. If the market rebounds in that case, a homeowner can sell the home quicker than the bank.

This occasionally applies to secured debt as well if the costs to pursue the security are cost prohibitive. This tends to appear in a bankruptcy where liquid funds are limited and creditors actually will opt to be treated as unsecured creditors to get liquid assets vs. Illiquid. E.g. old BMW with resale of $20,000, but fair value after costs of liquidation (seizing vehicle, sending it to auction, etc.) is more like $6,000 - but the debtor has $10,000 of income during bankruptcy that would be distributed to the lender.

Bear in mind that the legal process to foreclose on a home is extensive; even in a good economy, it can take 6-8 months:
1. Bank needs to make reasonable attempts to collect missed payments (usually 3 missed payments along with nonstop phone calls and letters, and prying cash out of your bank account if they find any, and you have iquid deposits at the same bank - this legally is commonly referred to as "set off")
2. Bank needs to apply for a court order. Then it has to give you a "redemption period" where it is your last chance to catch up on missed payments.
3. Then bank needs to apply for a court order to actually foreclose.
4. Foreclose needs to be granted by court. Then they have to get a civil enforcement agency or the like to actually physically force you out.
5. Bank needs to make a reasonable attempt to mitigate damages, such as selling the home by. If you owe more or close to the market value of the home, the bank likely is to lose even more money at this stage, on top of all the legal fees and lost income. in many cases, the banks will actually wait for the market to recover before actually doing this, or foreclosing for that matter. My RE agent had a client who had been living in his home for almost a year without making one mortgage payment.

Those thinking of restructuring are often encouraged by their legal counsel or debt restructuring firm to take advantage of this long process, as they can get away with not making mortgage payments , and condo fee payments during it (or, rent payments for that matter from moving to a rental). The gain can easily be in the 5 digits on top of the negative equity erased.

If you really wanted to be a douche: you can do all of:
- declare bankruptcy or file a division II proposal
- live in your home for as long as possible not making the payments, forcing the bank to eventually deal with your negative equity;
- walking away from any other unsecured debts you have: line of credit, credit card, etc.

Under the Bankruptcy and Insolvency Act, any net income you make over $2,200/mo. is 1/2 garnished for your creditors. For $50,000/year: net monthly take home is about $3200/mo. The period for a 1st bankruptcy is 9-21 months; lower end for those with less income. Your creditors would get $500/mo. for 9-21 months; $4,500 on a bad one. The legal fees are about $1,800 + 20-25% of distributions to creditors.

So whatever unsecured debts you want to dump, you can dump them all for this cost of approx. $10,000. Alternatively, you can file a Consumer Proposal offering them $15,000 (which is less harmful to your credit). Your home meets the maximum $40000 equity exemption, so you can do as you please with it. If your mortgage and condo fees are $2000/mo. - then that is another $16,000 gain for not paying for 8 months while living in it - plus the $50,000+ deepening hole eventually erased.
Last edited by FirstGear on Aug 9th, 2020 11:07 pm, edited 1 time in total.
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Deal Fanatic
Jul 1, 2007
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Wow, this thread right here is a microcosm for downtown residential real estate. It's gonna be hard for anyone to sell a condo in the middle of a city when everyone's working from home, lol. Then there's all that downtown office space.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
[OP]
Newbie
Jul 28, 2020
7 posts
4 upvotes
Wow, thank you @FirstGear for such a thorough explanation, I really appreciate it! It is a lot of food for thought for me.
[OP]
Newbie
Jul 28, 2020
7 posts
4 upvotes
Thalo wrote: Wow, this thread right here is a microcosm for downtown residential real estate. It's gonna be hard for anyone to sell a condo in the middle of a city when everyone's working from home, lol. Then there's all that downtown office space.
Yep. And my case is relatively mild because I got what was a really good deal at the time. At the peak these condos were selling for $600k-$700k, so people who bought then are now $200k-$300k in the hole. At that point just walking away starts to become a no brainer - your credit will recover faster than your equity.
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Nov 2, 2013
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qsdqsd wrote: It is a lot of food for thought for me.
The property of a bankrupt would be divisible among the creditors, excluding exempt property from seizure or execution under applicable provincial law the property is situated :

a. Personal property used to earn income from the debtor’s occupation, for up to $10,000;
b. Household appliances and furniture of up to $4,000;
c. Equity in one vehicle for up to $5,000;
d. Equity in one principal residence of up to $40,000 in Alberta; $9,000 in British Columbia outside Vancouver or Victoria; $12,000 in Vancouver or Victoria.

(Bankruptcy and Insolvency Act, RSC 1985, c. B-3, s 67 (the "Act"))
(Alberta: Civil Enforcement Act, RSA 2000, c. C-15, s 88; Civil Enforcement Regulation, Alta Reg 276/95, s 37)

Under those provisions, bankruptcy is not even that bad for a lot of people, as you can potentially hold onto up to $59,000 of assets exempt from distribution or seizure. Those working with a good Licensed Insolvency Trustee (only ones who can legally file an insolvency proceeding on your behalf) can craft a Division II Proposal taking these factors into account, without actual bankruptcy.

A Division II Proposal ("Consumer Proposal") is a legally binding insolvency process under the Act... an effective Consumer Proposal offers creditors something more than what they'd get in a bankruptcy (usually $0, especially if done right), while not having to declare actual bankruptcy. It stays on your bureau for 3 years after you pay it off, which can be worthwhile if in those 3 years you don't need your credit for something that'd be more profitable than the debt erased. However, bankruptcy is usually more profitable.
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FirstGear wrote: Forgot to mention - usually debt restructuring is done to maximize the gain - so someone in your situation would take the opportunity to also write off other debts at the same time; to go "all in". Factoring in this, your gains may be well over the losses from just the losses on the property, depending on what else you have to dispose.

You can choose to keep your residence if you want. Debt restructuring can be customized, unless you're declaring a bankruptcy - where only property with $40,000 of equity or less, is exempt... though that sounds like your case anyway.

In my case my total gain was over $100,000 - but I kept my residence, and did not have to declare bankruptcy. My debts were not large enough to warrant an actual bankruptcy, and I wanted to go to law school in the near future. If I had disposed of it, it would had been closer to $150K+. My file was more complicated than most, but I basically took advantage of certain parts of the Bankruptcy and Insolvency Act, Income Tax Act, & IRFS reporting rules to propose to the creditors only 10 cents to the dollar - in a manner they were unlikely to object. To support this, I reduced my annual gross income from approx. $130K to just $30K net for 2018-2019, so even if my proposal did not get accepted, and I was "forced" into bankruptcy - the creditors would get $0. My Accounting (net) income was much lower than taxable income. I can write a book on my file but if you PM or email me I can share what's digestible.

There are usually 4 avenues of restructuring:
- bankruptcy
- division I or division II proposal (latter is "consumer proposal": basically playing chess and telling creditors, with a legally binding agreement: "im considering bankruptcy... but here's $X instead, which is more than what you'd get if I went bankrupt."
- OPD government program (government forces a settlement for debt without any interest charged, in return for blemished credit during the repayment period plus 2 years)
- debt settlement (negotiated settlement with each of your creditors, kind of like "settling outside court").

Alternatively, some walk away from certain debts, and force the creditors to take action (e.g. handing back the keys to the bank) - and then finally initiate one of the above to maximize gains. If debt is unsecured, some debt gets "erased" this way when it is cost prohibitive to pursue it... or delayed for months or years before anything happens, such as underwater mortgages. If the market rebounds in that case, a homeowner can sell the home quicker than the bank.

This occasionally applies to secured debt as well if the costs to pursue the security are cost prohibitive. This tends to appear in a bankruptcy where liquid funds are limited and creditors actually will opt to be treated as unsecured creditors to get liquid assets vs. Illiquid. E.g. old BMW with resale of $20,000, but fair value after costs of liquidation (seizing vehicle, sending it to auction, etc.) is more like $6,000 - but the debtor has $10,000 of income during bankruptcy that would be distributed to the lender.

Bear in mind that the legal process to foreclose on a home is extensive; even in a good economy, it can take 6-8 months:
1. Bank needs to make reasonable attempts to collect missed payments (usually 3 missed payments along with nonstop phone calls and letters, and prying cash out of your bank account if they find any, and you have iquid deposits at the same bank - this legally is commonly referred to as "set off")
2. Bank needs to apply for a court order. Then it has to give you a "redemption period" where it is your last chance to catch up on missed payments.
3. Then bank needs to apply for a court order to actually foreclose.
4. Foreclose needs to be granted by court. Then they have to get a civil enforcement agency or the like to actually physically force you out.
5. Bank needs to make a reasonable attempt to mitigate damages, such as selling the home by. If you owe more or close to the market value of the home, the bank likely is to lose even more money at this stage, on top of all the legal fees and lost income. in many cases, the banks will actually wait for the market to recover before actually doing this, or foreclosing for that matter. My RE agent had a client who had been living in his home for almost a year without making one mortgage payment.

Those thinking of restructuring are often encouraged by their legal counsel or debt restructuring firm to take advantage of this long process, as they can get away with not making mortgage payments , and condo fee payments during it (or, rent payments for that matter from moving to a rental). The gain can easily be in the 5 digits on top of the negative equity erased.

If you really wanted to be a douche: you can do all of:
- declare bankruptcy or file a division II proposal
- live in your home for as long as possible not making the payments, forcing the bank to eventually deal with your negative equity;
- walking away from any other unsecured debts you have: line of credit, credit card, etc.

Under the Bankruptcy and Insolvency Act, any net income you make over $2,200/mo. is 1/2 garnished for your creditors. For $50,000/year: your net monthly take home is about $3200/mo. The period for a 1st bankruptcy is 9-21 months; lower end for those with less income. Your creditors would get $500/mo. for 9-21 months; $4,500 on a bad one. The legal fees are about $1,800 + 20-25% of distributions to creditors.

So whatever unsecured debts you want to dump, you can dump them all for this cost of approx. $10,000. Alternatively, you can file a Consumer Proposal offering them $15,000 (which is less harmful to your credit). Your home meets the maximum $40000 equity exemption, so you can do as you please with it. If your mortgage and condo fees are $2000/mo. - then that is another $16,000 gain for not paying for 8 months while living in it - plus the $50,000+ deepening hole eventually erased.
I think you misread his income. He makes $150,000 not $50k.

qsdqsd - Assuming there aren't any other financial or personal considerations you haven't mentioned, none of the bankruptcy type options (consumer proposal, bankruptcy, OPD) are appropriate for someone in your position. I think you should go back to your original question about how to borrow $50k at a reasonable interest rate. Failing that you could cash the RRSP. I realize there are tax implications but if you can make the argument you're moving for work you might be able to write off your real estate losses. Might not apply to you.

Bottom line is you have a good income and great credit and no debt other than your mortgage. That's about as good as it get's these days. I'd recommend either:
1. Increase your unsecured LOC. If you move to Mexico you could have that paid in a year.
2. Try to rent and cover the $1000 a month deficiency. That would give you 4 years ($48k vs $50k) to wait out the market and your mortgage principal would decrease as well.
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Nov 2, 2013
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Booyayyc wrote: I think you misread his income. He makes $150,000 not $50k.

qsdqsd - Assuming there aren't any other financial or personal considerations you haven't mentioned, none of the bankruptcy type options (consumer proposal, bankruptcy, OPD) are appropriate for someone in your position. I think you should go back to your original question about how to borrow $50k at a reasonable interest rate. Failing that you could cash the RRSP. I realize there are tax implications but if you can make the argument you're moving for work you might be able to write off your real estate losses. Might not apply to you.

Bottom line is you have a good income and great credit and no debt other than your mortgage. That's about as good as it get's these days. I'd recommend either:
1. Increase your unsecured LOC. If you move to Mexico you could have that paid in a year.
2. Try to rent and cover the $1000 a month deficiency. That would give you 4 years ($48k vs $50k) to wait out the market and your mortgage principal would decrease as well.
Recalled reading $50K, but maybe it was corrected to $150K. That would make it not worthwhile to file an insolvency due to a much larger surplus income the OP would have to pay back in a bankruptcy (which affects his/her negotiation power in a Proposal).

Unless OP can successfully reduce NET income to a threshold low enough that the creditors would get close to nothing, OR he/she has a lot of other unsecured debt to eliminate. Hard to do unless he/she has $100K+ of losses to deduct... but it is possible.

However, it doesn't change the economics behind walking away from the mortgage, versus taking another loan to reduce the negative equity, and also incurring all the transaction costs to liquidate the property. Taking one loan to cover another loan can get messy, especially when it is $50,000 + transaction costs... a steep price to pay to preserve a credit score, especially in this economy....

The other feasible solution would be to just wait for the market to recover and endure the carrying costs of the condo meanwhile. If possible, also by tax-deducting CCA and the carrying costs by finding a business home office use for the home, or if the home is rented out. Most people shy away from claiming CCA fearing capital gains, but this is an odd scenario it can make sense.

If the condo is rented out, a CCA claim on $400,000 is $16,000 tax deduction/yr (4% per year).
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[OP]
Newbie
Jul 28, 2020
7 posts
4 upvotes
Thanks all for the suggestions, especially @FirstGear and @Booyayyc!

Yeah after reviewing the insolvency options, they are not profitable in my case due to garnished salary. It's an interesting option nonetheless, thanks @FirstGear for suggesting it.

I also didn't consider CCA claim in my cashflow calculation for renting it out option. That might bring net cashflow close to break even. I am still somewhat uneasy about holding a condo in these times though - I wouldn't be surprised if it drops in value faster than equity building up from rent...

For now I just acquired more LOCs (the best being CIBC at prime + 4%), and I will see what offers I can get, and then if they are very low maybe consider renting it out.

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