Is your Toronto condo worth less than your mortgage? What to do if you’re ‘underwater’

Financial experts tell CTV News Toronto, what steps homeowners should take if they are dealing with negative equity in their condo. (Pexels/Luis Ruiz)

It’s no secret — Toronto condo sales continue to tumble, plunging more than 30 per cent over the past year, adding further strain for those who bought at market peaks or hoped rental income would cover the bills.

For a growing number of owners, the math no longer works — and some feel as if their financial life has “turned upside down.”

As the city’s condo market sags under the weight of stagnant inventory and falling demand, many homeowners are finding themselves with negative equity — owing more than their property is worth.

According to the latest figures from the Toronto Regional Real Estate Board (TRREB), condo prices in Toronto are down 7.3 per cent, year-over-year, with the average condo price in the city now sitting at $710,724.

The Bank of Canada warned last week that if the global trade war persists, the financial stress on households could surpass levels seen during the 2008 financial crisis. With average rents also down seven per cent year over year, some condo investors could find themselves losing money every month.

Experts say the situation is especially urgent for those nearing mortgage renewal, or relying on rental income to stay afloat.

What does it mean to be underwater?

“It’s a huge risk,” said personal finance expert Doug Hoyes. “Everyone thought prices were going to keep going up, but mathematically prices cannot go up forever — otherwise every condo in Toronto would be $10 million.”

Hoyes says he’s seen lots of people whose “monthly mortgage payment on renewal is going to go up a thousand bucks a month.”

According to a recent report from Rates.ca, 30 per cent of Canadians believe condos are no longer a good investment. Meanwhile, 57 per cent said they would not buy a condo for any reason.

But the problem isn’t just falling prices, for those renting out their property, that may mean a loss of value in rent. A recent Rentals.ca/Urbanation report found that average rents in Toronto have dropped to a 32-month low of $2,589.

“I had this exact call the other day,” Hoyes said. “If you‘re renting out your condo and not getting enough to cover the mortgage, taxes and fees, you‘re losing money every month.”

Selling could make things worse

Some owners may be thinking about cutting their losses; but experts say that can come with a serious financial hit. Hoyes says selling a condo with negative equity means covering the gap yourself, which very few people are prepared to do.

“If you have $200,000 of negative equity, you‘re going to have to give the bank $200,000 when you sell the house in order for them to take the mortgage off,” he said. “The bank’s not going to release the mortgage unless they get all their money.”

Hoyes warns, in some cases, that could mean personal bankruptcy.

What should you do?

The key, experts say, is to act early and assess your financial position with clear eyes.

“Take a snapshot of where you are: figure out your spending, your income, where you can cut back or earn more,” said Radha Maharaj, adjunct finance professor at the University of Toronto. “You have to face it head on — that’s the first thing.”

If you‘re struggling with payments, Maharaj suggests talking with your mortgage lender. She says some may allow deferred payments, extended amortization, or temporary interest-only arrangements.

“If you‘re younger, have a steady job and are able to tread water, you wouldn’t want to sell,” Maharaj said. “But if you were banking on that equity for retirement or downsizing (in the near future), you may need to consider how much of a loss you can absorb.”

‘You have to move forward’

Hoyes urges underwater owners to ask themselves three questions: “When does my mortgage come up for renewal? What is the property worth? And what are the carrying costs?”

The worst mistake, he says, is denial; assuming the market will bounce back quickly or that rent will cover the gap.

“If the condo is dropping in value every single month, then you‘re digging yourself a hole,” he said. “There’s a lot of people in this situation and there will be more, because there are more condos coming online.”

Nonetheless, both experts agree: whether you ride it out or take action, the only bad choice is ignoring the numbers.

“People don’t realize how emotionally charged money is,” Maharaj said. “But you have to move forward.”