Real Estate

What happens to underwater mortgages@

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  • Jun 18th, 2016 12:25 am
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[OP]
Sr. Member
Nov 13, 2011
652 posts
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Vancouver, BC

What happens to underwater mortgages@

Say you take out a mortgage for 400k with 100k downpayment and the value of your property drops to 300k. When it comes time to remortgage do you have to come up with the difference? I know you can walk away from the mortgage in Alberta without personal liability.. what are your options in the rest of Canada?
16 replies
Sr. Member
May 29, 2012
528 posts
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Southern Ontario
I think you do have to come up with the %5 min when you remortgage.
In Ontario I dont think you can get away from a mortgage without personal bankruptcy.
But... I'm not an expert so I may be wrong but thats how I understand it to be.
Deal Addict
Aug 10, 2013
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Toronto
You keep paying the mortgage as usual, and ride it out hoping the value goes back up which it normally does. You only file Bankrupcy when you're no longer to make your payments
Deal Addict
Jan 2, 2015
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darkcloud8282 wrote: Say you take out a mortgage for 400k with 100k downpayment and the value of your property drops to 300k. When it comes time to remortgage do you have to come up with the difference? I know you can walk away from the mortgage in Alberta without personal liability.. what are your options in the rest of Canada?
You borrowed $300,000, so you need to pay that amount plus interest. If the house's value dropped to $300,000, the bank could still foreclose and sell the house for most of that value so the bank probably wouldn't force an immediate foreclosure (getting regular payments is more profitable than trying to sell the house).

Now I've heard that in the US, if your house value drops below the remaining amount on your mortgage the bank may foreclose on you even if you can keep up with the payments, assuming the homeowner doesn't give up first! Maybe that's possible in Canada too. I sure hope not!
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Feb 9, 2009
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Canada has had a declining market for 20 years so nobody really remembers... time will tell...
Deal Expert
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Jun 12, 2007
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darkcloud8282 wrote: . .. what are your options in the rest of Canada?
ON uses "power of sale" instead of "foreclosure". In ON, you can't walk away from your underwater mortgage like in AB.

If your bank triggers POS in ON, you are still personally on the hook for the difference of the outstanding mortgage balance and what your home is worth under POS

Also for AB, if your home mortgage was CMHC insured, CMHC will sue for the difference between the insured amount and the bank foreclosure sale price,
Member
Jun 4, 2016
231 posts
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l69norm wrote: ON uses "power of sale" instead of "foreclosure". In ON, you can't walk away from your underwater mortgage like in AB.

If your bank triggers POS in ON, you are still personally on the hook for the difference of the outstanding mortgage balance and what your home is worth under POS

Also for AB, if your home mortgage was CMHC insured, CMHC will sue for the difference between the insured amount and the bank foreclosure sale price,
Therein lies the problem: people generally do everything to be able to keep paying their mortgage, but if they get to the point of being foreclosed, or whatever it is called, they might as well declare bankruptcy if they know the mortgage is underwater. OK, you take out every penny of your chequing, savings, TFSA, RRSP (be careful about the taxes!) to pay down the mortgage, and then...they are left with no assets to back the difference, so, in that case, they WILL declare bankruptcy.
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Feb 2, 2014
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darkcloud8282 wrote: Say you take out a mortgage for 400k with 100k downpayment and the value of your property drops to 300k. When it comes time to remortgage do you have to come up with the difference? I know you can walk away from the mortgage in Alberta without personal liability.. what are your options in the rest of Canada?
Not sure what you mean by "remortgage".

If your term expires, the lender will likely renew it and you continue to make your payments.

You can't refinance, as in this case, there is no equity.
Kevin Somnauth, CFA
Principal Broker - First Toronto Mortgage - MA (Ontario #13176, BC #X301007)
Real Estate Salesperson - Century 21 Innovative
Deal Addict
Nov 29, 2005
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CdnRealEstateGuy wrote: Not sure what you mean by "remortgage".

If your term expires, the lender will likely renew it and you continue to make your payments.

You can't refinance, as in this case, there is no equity.
At the end of you mortgage term your mortgage will be reassessed based on the value renaming and current rates. If your asset is worth less then the amount of the loan then that is bad debt on the banks books which severely restrict it's ability to lend against it and the bank will do everything it can to get rid of it. The bank will demand the difference be covered and if the mortgage holder is unable to make the difference then the bank will most likely trigger CMHC insurance which will try to arrange a new payment options for the mortgage holder (at the prevailing interest rates) to fund addiitonal amount above and beyond the new mortgage (also given how overextended you are you will be subject to a much higher interest rate as you are a high risk borrower) to keep money coming in and CMHC will pay out to the bank the difference. If the mortgage holder is unable to make the payments then the property will be sold at the current market value and then CMHC (government) will go after the mortgage holder for the additional amount owing which cannot be defaulted/bankrupted on.
Member
Jun 4, 2016
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Bunkhouse wrote: At the end of you mortgage term your mortgage will be reassessed base don the value renaming and current rates. If your asset is worth less then the amount of the loan then that is bad debt on the banks books which severely restrict it's ability to lend against it and the bank will do everything it can to get rid of it. If it is CMHC insured, the bank will demand the difference be covered and if the mortgage holder is unable to make the difference then the bank will trigger CMHC insurance which will try to arrange a new payment options for the mortgage holder (at the prevailing interest rates) to keep money coming in and CMHC will pay out to the bank the difference. If the mortgage holder is unable to make the payments then the property will be sold at the current market value and then CMHC (government) will go after the mortgage holder for the additional amount owing which cannot be defaulted/bankrupted on.
Wait...what? You can't be discharged from CMHC debt if you file for bankruptcy? Really? But what would happen if those people no longer have a job? I suspect that a housing crash like that will cause high unemployment, just look at the skilled trades (construction related) and you will understand why.
[OP]
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Nov 13, 2011
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Vancouver, BC
Anyone have sources or documents to support their claims?
Deal Addict
Jan 2, 2015
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tempre2016 wrote: Wait...what? You can't be discharged from CMHC debt if you file for bankruptcy?
There are very different rules for bankruptcy when dealing with secured vs unsecured debt. CMHC debt is secured, much like a mortgage. Bankruptcies tend to save you from unsecured debt, such as credit cards, unsecured lines of credit, etc.
Member
Jun 4, 2016
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FoFai2015 wrote: There are very different rules for bankruptcy when dealing with secured vs unsecured debt. CMHC debt is secured, much like a mortgage. Bankruptcies tend to save you from unsecured debt, such as credit cards, unsecured lines of credit, etc.
So, under what circumstances can you walk away from an underwater mortgage in Canada outside Alberta and Saskatchewan?
Deal Addict
Jan 2, 2015
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Filing bankruptcy protects you in many ways from the actions of an unsecured creditor, like a credit card. But, it does not protect you from a mortgage bank (secured creditor) if you are behind on the payments. If they wish to enforce ‘power of sale’ and take the house, they can. So, if you are a little behind, you will need to bring your mortgage arrears current. Neither a bankruptcy, nor a consumer proposal, will deal with your mortgage arrears.

However, if you are quite a bit behind, you may have to seriously consider letting the house go. If you cannot afford to keep up with your mortgage payments in the long term, even after eliminating all your other debts through bankruptcy, then selling your home may be your best option. If there is a shortfall, this debt will be included in your bankruptcy allowing you to completely walk away from your mortgage. If there is any equity above any provincial limits, then any equity will be paid into your bankruptcy for the benefit of your creditors.
Link: https://bankruptcy-canada.com/bankruptc ... ankruptcy/

If you try to walk away from the house, the bank will sell it, and then come after you for the difference. I think the debt might become unsecured at that point, letting you avoid paying it if you then declare bankruptcy. But you would lose the house.
Member
Jun 4, 2016
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FoFai2015 wrote: Link: https://bankruptcy-canada.com/bankruptc ... ankruptcy/

If you try to walk away from the house, the bank will sell it, and then come after you for the difference. I think the debt might become unsecured at that point, letting you avoid paying it if you then declare bankruptcy. But you would lose the house.
Yes, I know that losing the house is a given if you can't pay a mortgage (behind because you have no income/assets). So, I was asking. "Jingle mail" may be the term they use, where you just walk away from an underwater mortgage because you have already liquidated all your assets that you can think of and used the cash to pay down the debt.
Member
Sep 1, 2013
403 posts
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l69norm wrote: ON uses "power of sale" instead of "foreclosure". In ON, you can't walk away from your underwater mortgage like in AB.

If your bank triggers POS in ON, you are still personally on the hook for the difference of the outstanding mortgage balance and what your home is worth under POS

Also for AB, if your home mortgage was CMHC insured, CMHC will sue for the difference between the insured amount and the bank foreclosure sale price,
This.

That being said, your lender can't do much unless there is an actual default event. That is, you miss a payment, or somehow else break your mortgage contract. Most likely, at the end of the term, the bank will want nothing to do with your property and will demand a repayment. That may trigger a POS in Ontario if you can't oblige.

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