Can't afford your mortgage? Here's what you need to know before you sell your home

As household debt and the cost of living continue to rise, fears of a looming recession grow.

The Bank of Canada highlighted financial stress among Canadian households as a key risk in its Financial System Review released May 18. A similar report from RBC Economics released May 3 mentions additional economic concerns over Canadian household debt as pandemic-era government supports ended and interest rates sharply rose.

Mortgage debt in particular was put "on a fast track," according to RBC.

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"By late-2021, Canada’s household debt-to-income ratio had exceeded pre-pandemic levels. And it’s remained elevated ever since," the RBC Proof Point report reads.

Close to 30 per cent of new mortgages have households paying a median of 25 per cent or more of their income to service their payments, one-third of mortgages have seen an increase in payments since February of last year and all mortgages will have increased payments by 2025-26, when renewals occur, according to the Bank of Canada.

RBC says while the amount of mortgages in arrears (missed mortgage payments) has remained steady at record lows—inflation, high interest rates and the soaring cost of living has caused many to rely on debt services such as loans, credit cards and lines of credit.

The bank predicts Canada’s mortgage delinquency rates could rise by more than one-third of current levels over the next year, and consumer insolvencies could go up by almost 30 per cent over the next three years, however, it expects most financial troubles to be manageable—at least in the short to medium term.

THINGS TO CONSIDER WHEN SELLING YOUR MORTGAGED HOME

If you anticipate being unable to make your mortgage payments, you may choose to sell your home. If you find yourself in this situation, there are several things to consider, according to RATESDOTCA.

Victor Tran, mortgage and real estate expert with RATESDOTCA, says many Canadians may have difficulty coming up with the necessary cash or finances to continue to pay their mortgage.

"They don't really have any other option to get out of it, but to sell their homes," Tran told CTVNews.ca. "Otherwise, the bank will do it for them.”

He says homeowners can take proactive measures to get out of a mortgage before it’s too late.

Understand your timeline: If you anticipate not being able to make mortgage payments, look at your finances and figure out how much longer you can keep making them, this will let you know how long you have until you need to sell your home and move.

"You know, and really run the numbers to say, 'Hey, this is how much I bring in every month for my employment. This is what I have to pay out every month for my expenses. How many more months can I really keep this house or stay in this home?'" Tran said. "Just kind of map out a timeline, and then you can tell your consultant professionals to help you execute that plan."

Determine your minimum sales price: Figure out how much money you need to make from selling your home in order to cover sales costs, listing and agent fees, legal fees and any penalties that may be involved in paying off your current mortgage early. Tran says for fixed-rate mortgages with pre-payment penalties based on the interest rate differential, this can often cost thousands of dollars. In some cases, your mortgage can cost you more than your home.

"Most people have been lucky and fortunate to see huge appreciation in house values. Personally, it's still pretty rare for me to see any of my clients—or just hear about people—that have mortgages that are higher than what the house is worth," Tran said. "But it has happened in the past for sure."

Research home prices in your area: If you know how much a home will go for in your neighbourhood, you can get a better sense of how much to expect your home to sell for.

"If you if you have that data of recent sales in the area comparable to your home, then yeah, that can definitely give you a rough idea of what your home could potentially sell for," Tran said. "But again, you know, there's other factors, external factors, you can’t control. It really depends on, the time of the year, the activity in the real estate market, but yeah, that's definitely a good indicator."

Plan your next steps: It’s important that you consider the costs of where you will live after selling your home. In some cases, it can be prudent to make living arrangements elsewhere before you sell your home.

Don't tip your hand: Sometimes you may wish to sell your home, but continue living there while renting from the new owners. RATESDOTCA says you should speak with your broker before making this known, as it can weaken your bargaining position.

"If they're desperate, and they are truly running into financial difficulties, then yeah, that kind of weakens their bargaining power. They may not be able to get top dollar for the sale of the home," Tran said.

WHAT HAPPENS WHEN YOU DEFAULT ON MORTGAGE PAYMENTS AND ARE FORCED TO SELL?

According to the digital mortgage platform nesto, the process that goes into forced home sales differs between provinces. Usually, however, it involves borrowers not being able to make their mortgage payments. The mortgage finance company says there are two ways lenders can force the sale of a home—depending on where they are in Canada.

The first is through power of sale (only in Ontario, P.E.I., New Brunswick and Newfoundland and Labrador), and the second is through foreclosure (which is how the rest of Canada does it).

Power of sale means the lender is required to sell the home for as much as it can get. All money from that sale must go towards the borrowers' debt—including outstanding mortgage balance, interest arrears or commissions. Once all debt has been settled, any leftover money from the forced home sale (if any remains) goes to the borrower, while the lender keeps the title to the property. If the money from the forced sale isn’t able to cover the borrower’s debt, then the borrower is on the hook for it and can be sued by the lender to pay what is owed.

Foreclosure means the lender takes possession of the home outright and is not required to pay the borrower any money from a potential resale, however, in most cases the borrower is also not responsible for any outstanding debt.

In some provinces—such as Nova Scotia—if the foreclosed home is sold for less than what is owed to the lender, the lender can apply to court to get the borrowers to cover the difference, according to Legal Info Nova Scotia. If there is money left over from the home sale, borrowers can apply to claim entitlement to the money.

Both options mean the borrower loses their home. 

---With files from CTV National News Producer Jordan Gowling