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2180 Steeles Avenue West,
Suite 204, Concord,
ON, L4K 2Z5

Phone:     905-761-7001
Toll Free: 1855-761-7001
Fax:          905-761-7005

Email: mortgageadvisor@rogers.com

13 January 2020

What are your options in case your mortgage debt exceeds your home value?

As you know, equity represents the value of your property minus your debt against it. In case your home loses value or a market correction (prices decline) reduces your property’s value, it may lead to negative equity, meaning you owe more than what you can sell your real estate for. However, there are certain ways to solve this problem or even avoid it.

The size of your down payment matters

Negative equity could happen if you purchase a property providing only a small down payment. If it’s less than 20%, you have to buy default insurance, the cost of which depends on the amount of your down payment: the smaller the down payment, the larger the insurance price.

For instance, you decide to purchase a condo for $450,000, providing 5% down ($22,500). The default insurance could be 4% of the mortgage amount. In other words, $450,000 minus $22,500 (down payment) is $427,500, and 4% from that is $17,100. Sometimes people pay for this insurance using their savings, but as a rule they tend to include it into their mortgages.

So when you make your first step in your own home, in addition to the down payment, closing costs, legal fees and moving costs, you will owe 98.8% of your condo cost.

In case the condo goes down in value during the first 5-6 years after the purchase, you will probably be in a position where you owe more than what you can sell it for.

What are other factors leading to negative equity?

Even with a large equity in your home (due to many years of payments or a big down payment) you still may face a negative-equity situation. If you refinance a mortgage to get more money, apply for a second mortgage, or choose HELOC, you could also end up with the same problem.

Lenders in Canada are strictly regulated to prevent negative-equity situations, especially when it comes to secondary financing. Nevertheless, when large mortgage debts are combined with circumstances out of your control (e.g. local rezoning, market changes, economic factors or even natural disasters), anything can happen.

Is there a way to avoid it?

When the housing market is hot or interest rates remain low, the idea of spending more to get the house of your dreams or benefit from additional credit to receive some cash could be very attractive.

Following a period of cooling, many potential buyers don’t see many opportunities to enter the market. And the fear of missing out is really strong. But the main way to avoid a negative equity situation is to not let yourself get into this trouble from the very beginning. Provide more than a minimal down payment and/or remain well below the financing you were given.

Does negative equity affect other decisions?

Yes, this situation could affect other your decisions. For example, you may not be able to sell your property as the money you’ll receive will not be enough for paying down the mortgage. That’s why you will need to pay the difference. In case you can’t sell your home, you also can’t move to a different city to take a new job or live closer to the people you love.

You also have limited options when it comes to mortgage renewal, as you can’t successfully negotiate with your existing lender for better rates or conditions, and you can’t switch the lender. No bank will give you more money than the cost of your property.

What are the options in case you are already in such a situation?

If you are facing the negative equity problem, it’s important to assess your situation thoroughly. Find the reason that led you to this and see if you can do anything yourself to change it.

If it’s because your mortgage is new or market conditions are unhealthy, do everything possible to tighten up your budget and raise the size of your payments. You can rent out a part of your home, garage or yard. There are various strategies of accelerating mortgage payments, so choose what is more referable for you.

In case it’s because of your debts on a HELOC, second mortgage or home-equity loan, try to pay them down as fast as you can. You could sell a vacation property or spare vehicle to provide a lump-sum payment. Additional payments on your first mortgage will also help, as they go straight to your principal and influence your equity at once.

And, please, do not make snap decisions. Always make your choices considering a realistic budget. Even if you can’t sell your home and move, there’s a chance to rent out your home and live somewhere else for a smaller price. If you can’t accelerate your mortgage payments because of a tight budget, it’s a good idea to solve your other bills and debts issues.






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