Five things to do if you are over-extended on your mortgage

Mortgage default may be rare in this country, but nearly 9% of indebted households need 40% or more of their gross income to pay their debt service charges, says the Bank of Canada Financial System Review.

If you can see problems coming, then you can take action to avoid foreclosure, which happens when lenders run out of other alternatives and borrowers can do no more to pay their debts. Here are five options to consider when you are being crushed by mortgage payments:

1. Extend amortization: If the mortgage has been paid down to 10 or 15 years, then extending it to 20 to 25 years or even to 30 years will decrease payments. In a lot of cases this will work, says Elena Jara, director of education for Credit Canada Solutions, a Toronto-based non-profit organization which offers free credit counselling.

2. Seek better terms: You can go for lower interest rates with the same or a different lender but with a potential penalty.If you are having trouble with payments with one lender, another may not want to take you on. But if you can present a case for a new income, you can go to a so-called specialty lender for a fresh look at your problem and potential solutions. If you just want to alleviate the problem, timing is crucial.

3. Renew at a floating rate: There is more risk but lower interest cost in floating rate mortgages. If you are on a fixed rate mortgage with relatively high rates and want to go to a lower floating rate, perhaps by taking the mortgage to another lender, then there may be relief when it is time for loan renewal. The present lender may add a penalty, but over time, floating rates and the often attractive rate on a one-year closed loan can offer relief.

4. Sell it and rent: In markets with high home prices as a result of speculative building, absentee owners will often rent at relatively low cost. That makes for good deals for renters.

5. Discuss a consumer proposal: The homeowner can avoid outright bankruptcy and foreclosure of the home by talking to creditors. The homeowner can make a consumer proposal in which a settlement plan is devised for the creditors. Secured creditors such as the banks or private mortgage lenders can work out new terms such as reduced payments or a payment bridge for a period of time with the homeowner.

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