Bankruptcy and Homeownership in Canada – Understanding the Immediate and Long-term Impact
There are several key factors about bankruptcy and homeownership in Canada that can shed light on how financial insolvency impacts your property rights and ownership and the legal and economic considerations involved both immediately and in the long term.
If you’re drowning in debt and you’re starting to fall behind on your credit cards and other bills, and you worry that you may soon also fall behind on your mortgage payments, you start to worry that you may lose your home.
It costs a lot of money to own and manage a home. There are mortgage payments, property taxes and home insurance to consider. On top of this, you also have maintenance and repair expenses, utilities, and, in some cases, homeowners’ association fees to take into account. These ongoing and one-time costs are crucial for managing homeownership effectively.
However, if you’re experiencing severe financial stress, and the only solution may be a personal bankruptcy, you then find yourself asking the commonly asked question: What will happen to my house after filing bankruptcy?
Bankruptcy in Canada can significantly impact homeownership, and the effects vary depending on individual circumstances. Here’s a general overview:
Immediate Impact on Homeownership
Immediate impacts include the risk of losing your home if you can’t keep up with mortgage payments and potential equity claims by the bankruptcy trustee.
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Impact on Mortgage
- Current Mortgage – Bankruptcy does not automatically discharge mortgage debt. If you’re up-to-date on your mortgage payments, filing for bankruptcy does not mean you will automatically lose your house. If you have very little equity in your home, (this will vary in each province’s Bankruptcy Exemptions laws), you might still be able to keep your house and continue making mortgage payments. This is possible if you can find a way to pay this amount on top of bankruptcy payments. For most people, the problem isn’t the mortgage itself but rather the credit cards, lines of credit, payday loans, and other bills. Keep note that bankruptcy can eliminate your unsecured debt and lower your debt payments enough each month, making it easier for you to meet monthly mortgage payments.
- Missed Payments – If you’ve missed mortgage payments before filing for bankruptcy, the lender might initiate foreclosure proceedings. Bankruptcy may not prevent a foreclosure if you’re already behind on payments. If you’re falling behind, it’s a good opportunity to consider whether you want to keep your existing mortgage. If you determine that even after filing bankruptcy you still cannot afford your house, you can choose not to keep the home and allow the bank to proceed with foreclosure. Any remaining debt after the home is seized and sold will be discharged as part of your personal bankruptcy.
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Equity in Your Home
In Canada, there are exemption limits that allow you to keep some of the equity in your home when you file for bankruptcy.These exemptions for home equity vary by province.
You can check here – Bankruptcy Exemptions by Province
If your home is in Ontario, for instance, the exemption for a principal residence is $10,783. This means that your principal residence (the home where you live) is generally protected up to a value of $10,783. However, if your home’s equity exceeds the exemption limit, your Licensed Insolvency Trustee might require you to either sell the property or buy back the equity.
The basic premise is that if you have built up equity in your home the law requires you to use that equity to pay off some of the money you owe to your creditors. So, if your house has substantial equity, the Trustee will typically seize and sell it to satisfy your debts.
Still, in certain cases, if the equity in your home exceeds the provincial exemption amount, it doesn’t necessarily mean you’ll automatically lose your home if you declare bankruptcy.
This could be dealt with in a few ways, such as:
- Even if you have significant equity in your home, you may still be able to keep your home by arranging to repay the equity. This could involve borrowing from friends or family, or securing a second mortgage to buy back the equity from the Trustee.
- Filing a Consumer Proposal instead of a bankruptcy.
- If a homeowner decides not to keep their home, they can choose to sell the property through the bankruptcy process. They will still be entitled to receive their exempt equity amount from the sale proceeds.
Protecting Your Home
- Principal Residence Exemption
If the equity in your home is equal or less than the provincial exemption limit, your home is considered exempt from seizure, meaning it cannot be taken as part of the bankruptcy proceedings. This exemption allows you to retain ownership of your property despite the bankruptcy.However, if the equity in your home exceeds the exemption limit, your home is not exempt from seizure. In this case, the excess equity may be subject to seizure by the LIT. The trustee may sell the property to recover the amount above the exemption limit to satisfy your debts.
- Continuing Payments
If you are able to make mortgage payments consistently and have sufficient income, you might be able to keep your home throughout the bankruptcy process.
- Keep your House by Filing a Consumer Proposal
One of the most effective ways to keep a home with substantial equity when facing financial difficulties is to file a consumer proposal.
In a consumer proposal, you present a repayment plan to your creditors that covers the equity value in your home. Unlike bankruptcy, a consumer proposal allows you to spread these payments over a longer period.
For instance, if bankruptcy would require you to pay $15,000 from your home equity, you could propose to pay $20,000 over 50 months at $400 per month. Creditors might accept this offer since it provides them with more than they would receive through bankruptcy. Meanwhile, you benefit by keeping your home and managing a more affordable monthly payment.
Impact on Future Homeownership
- Credit Score
Bankruptcy significantly impacts your credit score, often dropping it below 500. This can make it challenging to secure new mortgages or obtain favorable interest rates. The bankruptcy will remain on your credit report for up to 6 to 7 years, which can affect your ability to buy a new home during this period. - Rebuilding Credit
After bankruptcy, rebuilding your credit is crucial if you plan to purchase a home in the future. This involves demonstrating responsible financial behavior, such as paying bills on time and managing credit responsibly. - Mortgage Application
Lenders will scrutinize your financial history and might be hesitant to approve a mortgage application for someone with a recent bankruptcy. You might need to provide a larger down payment or accept higher interest rates.
Long-Term Considerations
- Impact Duration
Bankruptcy affects your credit for up to 7 years from the date of discharge (or 14 years if it’s your second bankruptcy). During this period, your ability to obtain new credit, including mortgages, can be limited. - Legal Advice
It’s wise to seek legal advice to understand the full implications of bankruptcy on your homeownership situation. A licensed insolvency trustee (LIT) can provide guidance on how to manage your home and any potential ramifications. - Financial Planning
Engaging in financial planning and credit counseling post-bankruptcy can help you rebuild your financial standing and help you work toward future homeownership goals.
Navigating bankruptcy and homeownership in Canada can be complex. It’s wise to consult with a licensed insolvency trustee before making any decisions. A trustee can provide guidance tailored to your specific situation and help you understand the implications to your home and overall financial health after filing bankruptcy. A trustee can also help you understand all your options, including perhaps if you can use a consumer proposal as an alternative to bankruptcy to allow you to keep your home.
Our licensed insolvency trustees at Richard Killen and Associates can give expert advice on all your options to a debt-free life and ensure you will not be making your financial situation any worse. Contact us today.
Interview About Mortgage Insurance, Mortgages and Bankruptcy
In part two of the video interview with David Grossman, a mortgage broker, he and Richard Killen, a Licensed Insolvency Trustee discuss mortgage insurance and how mortgages work with bankruptcy in Ontario.
Ontario Mortgage Insurance Explained |
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| Richard | Now there’s always further protection that goes into mortgages. It’s called mortgage insurance. I know when you’re dealing with a bank, they’re prompt to line up mortgage insurance. Is this insurance for you, is it? |
| David | This is insurance for the borrower, life insurance and/or disability. If the mortgage is paid off when a person dies, then the home would go to the estate. |
| Richard | So it protects other people but not the borrower? |
| David | Well, no. Let’s say, there’s a husband and wife. It might protect one of the borrowers. |
| Richard | If I’m married and I buy a million-dollar house in my name. I have a $500,000 mortgage insurance and then I die. The insurance company will write a check to whom? |
| David | If you get regular life insurance you name the beneficiary so normally you name the beneficiary as somebody in your family. |
| Richard | What do you mean by mortgage insurance? |
| David | The banks sell mortgage insurance and I believe that if somebody dies, the money goes straight to pay off the insurance or if there’s a claim, it goes to reduce them. |
| Richard | That’s why they want the mortgage insurance? |
| David | Yes. And also because they like selling add-ons and extras because you can make a lot of extra money selling different things. You don’t have to buy insurance from anyone. It’s a good idea to do so if you have heirs, a family, or a spouse. If something would happen to you, would you want your heirs to have to sell or would you want them to continue to live in the property? If you want them to be able to continue to live in the property, you have to think about how they are going to manage financially assuming you’re the breadwinner or the primary breadwinner. Your estate, your heirs will benefit by having insurance and that’s, I think, the main reason why people should get insurance. |
| Richard | That speaks for insurance, in general. It’s always a good idea to have some protection against eventualities. We don’t predict the future very well. As human beings, we’re poor at that. But this business about mortgage insurance, is it essentially an insurance where you’re purchasing, which will cost you money, but you’re insuring the lender from a loss if something happens? |
| David | Well, yes. If you die and you have a mortgage, the mortgage won’t disappear. They’ll still have legitimate charges on the house. The question is how will they pay for it if your income is gone. You may not be able to service the debt. |
| Richard | So that leaves the lender not getting paid? |
| David | That’s correct. |
| Richard | Is it why they insist on you having insurance? |
| David | They don’t they don’t insist. We have to offer people insurance and they don’t have to take it. There were cases before where, let’s say, somebody bought a house and the minute you sign and your purchase is firm like you’ve waived all financing conditions or anything else. Let’s say, that house is closing in 60 days. If you die between now and the closing, you still have to proceed with that contract. There was a case of a husband and wife and the husband died. They didn’t have insurance was sued because she didn’t close on the house. She couldn’t close the house but she was sued. That’s why, the minute you firm up your deal and you’re dealing with your bank or mortgage broker, you don’t necessarily need to take the insurance from them. However, it’s a good time to be looking at insurance for your benefit and the benefit of your heirs. |
| Richard | In the example that you just gave where the purchaser dies before the closing, the spouse or beneficiary of the estate was then responsible for closing the sale. But the lender wasn’t committed? |
| David | The lender can back out. When we get people a mortgage approval, usually, it’s a conditional approval. We’ll submit an application and we’ll say, this person makes a certain amount of income. The lender can get out of that deal up until the day of closing. They verify the employment and if they find out, they can back out. |
| Richard | So it’s kind of a one-way street, right? |
| David | It’s a one-way street. Death is never a good option. |
| Richard | Let’s stick to that philosophical plane. Nobody dies. Even though nobody dies, unexpected things happen to people – sickness, and so forth. These are the people we see in the insolvency business. The people we see have some negative unforeseen things happened to them. Can you, as a mortgage broker, use their equity they may have to help them get over rough patches even though that might affect their credit rating? |
| David | Yeah, for sure. If there’s equity in a home and people run into some kind of problem, things do happen in life, they can access the equity in the home. |
| Richard | Even if their credit rating has been adversely affected by what’s going on? People don’t give up right away when they start having problems. They try to keep things afloat but they can easily find themselves falling behind in payments as they struggle to take from Peter to pay Paul. Six months down the line, this problem hasn’t gone away. They still have equity in the home but now, the credit rating has become besmirched. Can you still help them? |
| David | Yeah. Lenders want to see that there’s a plan. They wouldn’t normally just lend money and not consider the borrower’s credit and what’s going on but they might look at it and say, “Look you have $50,000 in credit card debt that you’re having trouble paying. If we get you a mortgage, we can reduce those payments. Some credit cards are 20-30%. In this case, if the person is without a job, he’s not going to be getting money from A or B-lender, but even if they’re borrowing money at 10-12%, it might help them to solve the problem and then they can improve their credit. Hopefully, they’re going to be reemployed again soon. |
| Richard | It will certainly be better than the 19-26% they’re paying on their credit card. |
| David | Exactly! |
Should I get A mortgage To Pay Off My Consumer Proposal? |
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| Richard | This is one of the options we discuss with people when they come to see us.
When people come to see us, We don’t just talk about bankruptcies and proposals. We talk about consolidation loans. We talk about using resources that they have or might have available or might be accessible to them to try to avoid having to do the bankruptcy or consumer proposal. |
| David | I think that people should start looking to have conversations with professionals like yourself and me before they start missing payments. There are people who have all kinds of equity in their house. However, if they miss payments and they let their credit go downhill, we can still get them the loan but it’s going to cost more money. It’s going to be more expensive. Therefore, they should talk to professionals before they start missing out a lot of payments for some guidance. |
| Richard | It’s a message in our advertising we try to get that across all the time. Why wait for things to have already gone downhill before getting advice. Advice is easy to give but not so easy to take.
This happens frequently. We have many insolvent people. They can no longer keep all their creditors happy through their resources, therefore, they do something with us. However, most people don’t want to do bankruptcy. I think in the 30 years that I’ve been in this business, I’ve never met anybody who wanted to do bankruptcy. They did because they had to but they sure didn’t want to. However, what we do is provide an alternative to bankruptcy. It’s called a proposal or a consumer proposal. They’ve got some equity in the home and so forth. They’re paying this proposal which can usually be done for over a five-year or 60-month period. They can get two or three years into it. Like anything else, it’s a negative drag on them. It may have a positive end but it’s a payment that they have to make. Therefore, we often suggest to them that they look at using the equity in their home to pay off the proposal. So, even though they’ve done something under the Bankruptcy and Insolvency Act, can you still help them with that? |
| David | Sure, yeah. We do get people who are in a proposal alone but the lenders will typically want to see the balance of the proposal being paid out in one shot from the loan proceeds. |
| Richard | That’s a normal consolidation factor, isn’t it? |
| David | Yes. |
| Richard | They don’t want the semi pay-outs? |
| David | No. They want a hundred percent payout. Correct me if I’m wrong but let’s say, there’s $1,000 monthly payment on a proposal. If somebody was to make a lump sum payment, it’s not going to reduce the thousand dollar-a-month. |
| Richard | I should say that it prepays is the proposal, so they can reduce their payments if they’re ahead. |
| David | Okay. That’s an interesting point. Generally speaking, lenders want to see the proposal paid out in full from the proceeds. It’s worth mentioning though that sometimes when people are looking to do a proposal they can get a mortgage at the same time and do a lump sum. |
| Richard | In other words, they can use their equity to fund the proposal process to get out of debt. |
| David | Right. Rather than having payments over five years, they could do it in a one-time shot and it’s done. |
| Richard | Then, they can amortize their payments over a longer stretch through the mortgage process. |
| David | Right. |
How to improve credit rating after a bankruptcy or consumer proposal |
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| Richard | Some of our viewers might be people who have done bankruptcy or a proposal and they perhaps have gone all the way through it. One of the things that’s going to be uppermost in their minds is regaining the good credit status that they used to have. Can you help them with that? |
| David | There are some things that people can do to re-establish their credit. The first thing they can do is get a secured credit card. Home Trust is a company that offers it. In a secured credit card, put down some money which they’ll hold on to. You can put down $1,000 or $1,500. They’ll hold the money but they’ll give you a credit card that you can start using. It’s convenient as a way to start rebuilding your credit. lt operates like a regular credit card except they’re holding on to some of your money.
You can also get a car loan because car lending companies are pretty flexible. They’ll charge a higher rate on a car but it’s a good way to start to re-establish credit. Eventually, you can get a mortgage from a bank if you’ve had two full years of re-established credit. By no means game over for you if you declare bankruptcy or go for a proposal. You do get a second chance. |
| Richard | Is there a difference, in your experience, for people who have done bankruptcy or proposal in their speed with which they can recover their credit rating? |
| David | I haven’t really noticed a difference. As from a lender’s point of view, they look at the date of completion of a proposal or from the date of discharge of the bankruptcy. A bank or an A-lender want to see two years minimum of re-established credit. You must make all of your payments on time in the proposal.
B-lenders will give you a mortgage lump sum the next day after a discharge of the bankruptcy or completion of a proposal. You may need to have it with a minimum of 25% down and a good provable income but they’ll do it one even one day after the discharge. You may not ever be able to get a mortgage from an institution who was part of the loss. So, if you lost money with the Bank of Montreal, you go to Royal Bank. If you lost money with both Royal Bank and the Bank of Montreal, you go to TD. If you lost money from all of them, then you have a problem. There’s always a lot of lenders out there. If you take steps to reestablish your credit, you do get a second chance. |
| Richard | This can happen immediately? |
| David | It can happen immediately, not with a bank but with our alternative lender. They’ll charge a little bit higher rate but if you’re back in the saddle, you’re making money, you can show you’re making money, and you’ve got 25% down. |
| Richard | But it doesn’t happen by itself. You have to be proactive about it. you have to be the one to make it happen. In other words, you can’t sit on the sidelines and expect your credit rating to come back automatically. |
| David | That’s correct. You gotta get out there and whatever the situation was that led to the loss, if it’s something that’s in your control, hopefully, you’ve learned something from it. It took a little while to get yourself set in the right direction. |
| Richard | People that go through the process to deal with an insolvent situation, they’re not happy about it but by the time they get through that, they’re pretty well-resolved not to repeat this process ever. It happens because they can’t foresee the future but they’re well aware that they don’t want to go through this again. |
| David | It’s a second chance. It’s a glass-half-full. They’ve learned some lessons and it’s a renewal to be let off the hook for getting into all that debt. |
Will I lose My House If I go Bankrupt In Ontario? |
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| Richard | On that particular point, I was telling you earlier that when people come in to see us and they have a home, the first thing they say to us it is “I don’t want to lose my house.” Now, what would you say to something like that at that point?
If you decide to do a proposal or bankruptcy, it doesn’t mean you’re going to lose your house. You have to disclose it because it is court-ordered. But I know that a good trustee like yourself has ways to arrange things so that people don’t have to necessarily lose their house. The idea of the bankruptcy, proposal, or the insolvency process is to serve both parties. You have two protagonists. You have a debtor and the creditors and they’re both supposed to get something out of this law. The debtor will get a fresh start and all the rest of the good stuff but the lender will have to resign himself to get what he can from the assets. However, if there’s equity in the home, some of the creditors agree with this completely that as long as they get the kind of money out of the situation that they were going to get if the house were sold, they don’t mind if the people get to keep the house. |
| David | Yes. They’re not looking to put people out on the street. |
| Richard | Well, David, I appreciate you coming down and I’m going to ask you one last question. People are looking at you here and listening to you. What would you say to them in terms of why they should come and see you under whatever circumstances they’re in? |
| David | Whatever the circumstances, it’s important to talk to people who know their business. I’ve been in mortgages for a long time and I deal with both prime borrowers. More of my business is in the alternate space, dealing with people who are not getting what they want for any reason. Furthermore, I’ve had a fair bit of experience dealing with people who have credit issues and who have debt issues. Don’t be afraid to pick up the phone and give me a call because you just never know. |
| Richard | It’s a no-lose situation, isn’t it? |
| David | It’s a no-lose situation. There’s no charge for advice. We don’t get paid unless we arrange a mortgage. That’s the nature of our business. We want to help people and I can pick up the phone and tell them what we know. |
| Richard | I’ve had this sitting on my table. I’ve written this book and the program itself is called after the title of this book. There are many different little intentions of this book but one of the main reasons why I produced the book is because there are several people I’ve seen go through the insolvency process. They let it get them down and let it diminish them in some way. The process should have a different outcome, an ultimate result. When people deal with us, we try to get at that and make sure that they can see the process that we’re going to apply would allow them to make life better. But you can’t get there unless you have the right attitude. And so, we call that The Glass Half-Full just to denote that attitude is a huge part of accomplishing anything in life. So, what you would say is that maybe these words would have a lot of impact on your business, too? |
| David | Every day, that’s the way. You have to make a choice of how you see things that come your way. The problems are opportunities, so, I think it’s a great approach. Moreover, I think you have a great show and I appreciate you inviting me to be on it. |
| Richard | It’s a pleasure to have you |
How To Get A Mortgage with Bad Credit
| Richard | Today we have with us, David Grossman. He’s a mortgage broker with Rock Your Mortgage which serves the Greater Toronto Area. Dave has been arranging mortgages for people for over fifteen years now and he brings to us a wealth of experience and know-how to a business which I find somewhat mysterious and a little bit intimidating. |
| Richard | What Does A First-time Homebuyer Need To Know? |
| David | There are several things that lenders are looking for. Presumably, people would need a mortgage. Most people don’t pay cash. Therefore, they need to have savings of at least:
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| Richard | Is there Anything Else They Need to Know? |
| David | Besides having a down payment, the other things that lenders are looking for are credit, income, and the type of property.
Credit Credit is important. People need to take steps to establish credit and maintain it. For a first-time homebuyer, lenders want to see that they have a history of at least a couple of years. The assumption is that people want to get mortgages from the bank or places like a bank, therefore, for those types of borrowers, they need to have about five to ten percent down payment. Income First-time borrowers need to have income too. If they are salaried, lenders want to see their job letters and pay stubs. If they’ve been in the job for less than one year, lenders would want to see some history of income. Moreover, people need to build up some credit. |
| Richard | If Borrowers Are Applying For Mortgages Through your Services, What Are The Mechanics of Doing It? |
| David | The first thing people usually do is give me a call. I’ve got a direct number that people can reach me on and I’d like to have a quick conversation with people to start. Within five to ten minutes, we can determine what’s the scope of what’s going on whether it’s a purchase or a refinance, or a pre-approval. We also take into account its urgency. Does somebody need the money to pay out a creditor in two days?
Once I know that there’s a potential deal, I will send people a two-pager application that they need to fill out and sign. Subsequently, I’ll give them a list of papers that we’ll need to go after the mortgage. |
| Richard | We were talking about this $75,000 down payment on a million-dollar home the downpayment to get a mortgage with a bank. There are other places where you can get mortgages. Do they not have similar requirements? |
CMHC Insurance and High Ratio Mortgages In Ontario |
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| David | There are A-lenders. They are banks, credit unions, and trust companies. With those lenders, you can get high-ratio financing. A lot of people have heard of CMHC (Canada Mortgage and Home Corporation). It is a government-run and they’re there to help Canadians buy homes. |
| Richard | Is CMHC an insurance program? |
| David | That’s right. It’s an insurer, however, it’s not in the way that people normally think about insurance. Unlike life insurance or car insurance, it comes at a borrower’s expense but it protects the lender. |
| Richard | How does CMHC help the borrower? |
| David | It helps the borrower because now, they can get high ratio financing or small down payment. |
| Richard | What If They Still Want To Buy a Million-dollar Home? |
| David | They can get it with just $75,000 down payment with the insurance. If you don’t have insurance on it, you’ve got to have 20% down payment. |
| Richard | Is the Bank Mortgage through CMHC as well? |
| David | Yes. The $75,000 is for an insured mortgage. If you have enough money, you can get it uninsured and make at least 20% down payment. |
Mortgage requirements for Self Employed People In Ontario |
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| Richard | You were telling me that there are papers that they need to bring to you. Are these requirements different if the borrower is self-employed? |
| David | There’s a key difference for self-employed people often in that self-employed people are going to minimize what they report for tax purposes. One of the benefits of being self-employed is that you can have legitimate tax expenses. Oftentimes, if a self-employed individual goes to the bank, the first thing the bank asks is their tax returns and notice of assessments. And the net income per the tax return and the notice of assessments are often not reflective of what’s happening.
Somebody could have $200,000 in sales and their net income is only $40,000. The bank looks at the $40,000 and may approve them for a $200,000 to $250,000 mortgage but this is somebody who might be able to afford $500,000 to $600,000 and wants a bigger home. Therefore, we have lenders which are not the prime banks. We have alternative institutional lenders. They charge between a half a point to a point more than the banks. They’ll also amortize the loan over a slightly longer period. Therefore, even though there’s a higher rate, the payment will still be affordable. This way, even self-employed people can get the mortgages that they want and still benefit from some of the tax write-offs. |
The 3 types of mortgage lenders in Ontario |
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| Richard | You mentioned A-lender before and I’ve heard the term ABC. How many are there? |
| David | Some lenders can go to Z but I think A, B, and C are good categories. |
| Richard | Can you tell me who are they? What makes an A-lender, B-lender and what are some of the pitfalls that one might accrue to dealing with one or the other? |
| David | There are three different types of lenders. A-lenders are essentially prime lenders or bank type of lenders, which most people would like to get a mortgage from because that’s where they would get the best rates and the best terms. In that same category are credit unions, trust companies, and there are many institutions out there that we consider as A-lenders that people have never heard of that serve strictly the mortgage brokerage community. There’s no shortage of A-lenders out there but they look for people who have a good credit and provable income.
The next category is B-lender. A B-lender is also an institution who will take self-employed borrowers. They’re more flexible in how they look at income and credit. Hence, people who have credit issues might still be able to get a mortgage from a B-lender. B-lenders will charge a percentage point more or less premium over what the bank is charging. If you can get your loan from an institution, either an A or B-lender, that’s the best-case scenario. However, if you’re in a pinch, there are C-lenders which are also known as private lenders. Private lenders include individuals who just like to lend out money on mortgages and MICs which stands for Mortgage Investment Corporations that do private loans. These are high-risk types of loans that you wouldn’t be able to get from an institution so you pay higher rates. Moreover, you pay fees. They are more expensive and should be avoided, if possible. The other thing about private loans or the C-mortgages is that they’re usually short-term loans. Therefore, lenders will want to know how are you going to repay the loan. That’s an important question. As a borrower, if you need it as a bridge to get over a hump, then it’s alright. However, you have to think long-term. You need to take into account that private lenders don’t always want to renew and if they do their fees could be high. If you get a one-year term and that lender is not prepared to renew the loan at the end of the year, you need to have a plan to get out of that private mortgage either by refinancing at the end of the year or selling the property. |
| Richard | For anybody, whether they’re a first-time buyer or not, the ideal thing is to try and get an A-lender mortgage, right? |
| David | Ideally, you want an A-loan but I also deal with a lot of people who don’t mind dealing with B-lenders. they don’t mind paying a little bit higher because it allows them to save a lot of money on their taxes as they’re not shy about writing down the legitimate business expenses. They don’t mind paying a little bit higher rate if it gets them into the property that they want and can afford. |
The Mortgage Stress Test In Ontario Explained |
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| Richard | A lot of people heard about the Mortgage Stress Test which is a relatively recent development. Can you explain that? |
| David | At the beginning of 2018, the Canadian federal government decided that they needed to take some steps to cool down the market. They implemented or imposed this stress test which applies to almost all institutional lenders except a few lenders that are provincially-regulated. However, the lion’s share of institutional lenders out there are federally-regulated.
It is called a stress test because you have to qualify for the mortgage as though it was 2 percentage points higher than the rates you are actually getting. For example, you’re borrowing at 3.5% and they look at what the payment is and figure out how much you can afford and how much mortgage they’re willing to give you. With the stress test, the rate goes up from 3.5% to 5.5% and then they look at how much they think you can afford and the result is that you could you can only get a smaller mortgage. That has really thrown a wet blanket on the real estate market. |
| Richard | If you’re borderline in terms of your means, this really might cramp your style. |
| David | Yes, it could definitely impact. But I think they’ve acknowledged that they’ve done enough to cool off the market, therefore, there’s a new incentive coming out to help first-time buyers. |
RESPs (Registered Education Savings Plan) |
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| Richard | There’s a lot of public discussions about the government assisting people to be able to get into the market. What is it out there for people? |
| David | There’s a couple of things. First of all, there has been a program where you can use the money that’s in your RESPs (Registered Education Savings Plan). That’s been around for quite a few years. I think the maximum was $25,000 per person that you could take out of your RESP tax-free. You have over 15 years to put that money back into your RESP. I believe the government has just increased that to $35,000 per person.
There’s a new thing coming up very soon where the government is going to contribute like a partner in your home. If the family makes less than $120,000 a year and your down payment is 10% or less, they could potentially get part of that government program. |
| Richard | Is it repayable? |
| David | Yes, when you sell the house. You have like 25 years to repay the government, therefore, I think it’s a plus. It’s free money. They haven’t released all of the details yet but we should know more very soon. |
| Richard | They have a similar program for RESPs where the government contributes. |
| David | Yes, that’s right. |
| Richard | In the insolvency business, we run into these things. RESPs are factored because they become an asset of the bankruptcy, however, not the part that the government has put in. Let’s say, there’s $1,000 on your RESP and the government put in 20%. Then, it’s only worth $800 to your creditors if you’re the owner of the RESP. I wonder if it’s going to be a similar kind of thing. |
| David | Yeah. I’m interested to see how that impacts people in a case of bankruptcy. |
| Richard | In the bankruptcy, the property itself is actually on the table. The creditors, through the trustee, have a right to the equity of the property. Whereas, if you don’t get to that stage in a proposal, then the RESP is a hypothetical asset. It’s not really at risk.
That’s not the actual money that the person would end up with if they sold their house. There are costs of selling them so the real equity they might have in that place might only be $175,000 instead of $200,000. Equity is the difference between what the thing is worth against what you might owe. |
This is the end of Part One of the Interview with Mortgage broker David Grossman. Stay tuned for Part Two of the interview.
Getting A Mortgage After A Consumer Proposal
People often wonder about their chances of getting a mortgage after a consumer proposal in Ontario. In the video above, Richard Killen, a Licensed Insolvency Trustee in bankruptcy in Toronto talks about “Would Services of a Trustee Prevent Me From Getting a Mortgage after a consumer proposal”.
One of the big ambitions of most people, especially for the family is to ultimately buy a house. People who have debt problems come to see a Trustee and end up do a bankruptcy or perhaps a consumer proposal, are going to be concerned whether this bankruptcy or consumer proposal is going to somehow prevent them from being able to obtain a mortgage at a later date.
The only way that we can really answer this is, nobody can really predict the future, there is a lot of factors that go into why a person can get a mortgage, and why they cannot. Bankruptcy and proposals on your record are just one factor, and also time. The bottom line is, it is impossible to really predict it, but generally speaking, after you have done a bankruptcy or proposal, and have solved all your credit problems, and some time has gone on, most people can and have the other ingredients properly arranged, they can get the mortgage.
An interesting aspect of it though is the mortgage renewal, people are highly concerned that they may lose their house when the renewal time comes. And what we found, I’m not an expert on this practice, but what we found is that renewals, I guess they are automatic, generally they are almost computer generated, and so very few people have this kind of problem renewing their mortgage.
What is a consumer proposal?
It is an option for debt relief which enables you to pay a portion of your debt by developing a “proposal”. You can also extend your payment term for up to five years or less. Once the creditors agree to the settlement, you can make your payments through your Licensed Insolvency Trustee. How will you know that this is the right solution to get out of your debt problem? You can have a thorough discussion with your trustee about your financial situation. Moreover, before making a decision, each of the options and alternatives will be explained to you. Upon making the decision, your licensed insolvency trustee will administer the proposal.
Consumer Proposal Mortgage Vs Bankruptcy
As opposed to bankruptcy, consumer proposals enable debtors to keep their assets such as a home. As long as you are keeping up with the payment and you are showing that you have become financially responsible, you can continue or renew your mortgage, even though a proposal will affect your credit score. In most instances, you can continue your mortgage with your current lender or bank. However, this might not be the case if you choose to switch lenders because your credit score will be taken into consideration.
Getting A Mortgage after Consumer Proposal In Ontario
Getting a mortgage after a consumer proposal is also possible if you have a stable income and you can provide a certain percentage of down payments.
This particular debt relief option enables you to save up because of the lowered monthly payment terms. Moreover, you will be advised by your Licensed Insolvency Trustee on how to manage your finances better and guide you on how to develop an effective budget plan. Always remember to fulfill your end of the proposal by avoiding late payments and paying the required amount every month as this will reflect on your credit record. In this case, your credit score will improve over time after filing the consumer proposal. Going through this will be difficult and needs an extra amount of time and effort but it will all be worth it in the end. After the consumer proposal, you will become eligible for a new mortgage or to purchase the home that you and your family have always been dreaming about.
The process will become easier and less stressful if you seek the services of a well-experienced Licensed Insolvency Trustee. By scheduling a free consultation, you will have a better understanding of getting a mortgage after a consumer proposal in Ontario.
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