My Mortgage is in Default: What it Means, and What to Do

With portions of the economy severely slumping and job uncertainty looming as the COVID-19 pandemic continues, it may be tough for some to maintain their monthly financial obligations. Imagine if you could no longer pay your rent or mortgage payment, for whatever reason. The uncertainty of what to do may be very crippling and overwhelming for anyone, whether you live in the city like Vancouver, or out elsewhere in the Lower Mainland. Simply maintain the terms of the mortgage and payments as agreed with the lender, and you will remain problem free. However, if the terms are not met and payments are missed, the lender may exercise a number of actions against you to save their security.
 
A number of factors may trigger a default of your mortgage. These include:

• not maintaining your regular mortgage payments
• not maintaining the property taxes – they must be kept up to date and never in arrears
• not maintaining home insurance – in some cases, fire insurance is the minimum coverage required – the lender will outline any specific insurance requirements
• not maintaining the property in good condition – the home must be kept habitable, in good repair and meet all municipal zoning requirements
• registering a 2nd mortgage or additional financing on the property – some 1st mortgage lenders do not permit secondary financing on a property.  This prohibition of secondary financing would be noted in the 1st mortgage contract.  The 1st mortgage lender may enforce this clause at their discretion. 
• having a number of creditor liens on the title of your property may potentially set off default action. Theses would include liens from Revenue Canada, creditors, third parties, etc. This specific type of clause would be noted in the mortgage contract if it is applicable.

What are my options?
 
There are several options for borrowers when in default. If a borrower is having difficulty maintain their mortgage payments, there are many options to consider, depending on your situation.  These include:

• Attempting to make an alternative payment arrangement with the lender.  Try and work out a partial payment plan, or some type of payment rescheduling with the lender.  You’re your communication open with the lender, as it reassures your sincerity in finding a solution, for the unfortunate temporary situation you may be in.
• Refinance your mortgage with the current lender, or with another lender. You may refinance with a different lender, and possibly secure more favourable terms elsewhere.
• Putting the property on the market and selling it.
• Offer up additional security for the loan. Perhaps you may ante up another property as the additional security and satisfy the lender.
• Transfer the property to another party.  This may be complicated and not always feasible.

 
It is best to always remain connected with the lender and reassure them that you are trying work out a solution. You want to avoid getting into a situation where you may be headed towards foreclosure. Mortgage foreclosure is costly and the last thing any lender wants to do is re-possess the property or force a sale through foreclosure.

Lenders Options When in Default:
 
If a borrower has exhausted all of the possible options and still unable to stop default, the lender has options they can exercise and help remedy the situation. The lender will try and work with the borrower to remedy the default, but if all fails, the lender may:
 

• Pay property taxes, strata fees, levies or insurance in your favour, items which may also be in default.  Then the lender adds these various payment amounts on to the mortgage you currently owe, and charge interest on the total. The lender may agree to do this for a specified period of time, provided there is sufficient equity in the property. 
• Accelerate or in other words, call the mortgage. The lender may request the loan due and payable in full.   The mortgage contract may have an acceleration clause, under which the lender may request the loan be repaid in full, almost immediately.
• Foreclose on the property. The lender will go to court to get title to the property, or get the property sold in order to recover the money lent.  If the lender takes title, they become responsible to the property, and manage its affairs moving forward.  The property is usually listed and put up for sale, shortly after title is transferred to the lender.  Foreclosure is the most common way for a lender to enforce its rights when their loan is in default. Foreclosure is a complicated matter, and legal advice should be sought.

 
If ever you are in a vulnerable financial situation and may default on a loan payment, the best advice is to contact the lender. Reach out to the lender well in advance of the payment due date and notify them. Let them know that you are going through rough waters, and that you want to make things work and ultimately find a solution. The worst thing to do is to remain silent and ignore the lender and your responsibility. Also, you may contact a mortgage broker, who will outline the options available to you. Needing help with your mortgage or have questions about your options? Give us a friendly call today at (604) 620 2697 and we’d be happy to help out!