If you can’t pay your debts, these are your last-resort options for relief
There are two regulated options: bankruptcy, and the less drastic consumer proposal
For those feeling overwhelmed and unable to pay their debts, there are two regulated, last-resort options: bankruptcy, and the less drastic consumer proposal.
Both put a freeze on creditors and allow you to eventually get out of debt while only paying part of what you owe.
Under a consumer proposal the amount paid back is negotiated with creditors, while bankruptcy payments are set by laws that also require you to sell assets.
First try getting free advice from non-profit credit counsellors to look at your full financial picture, and explore gentler options like an interest freeze to help pay off debt.
There is a risk of falling back into debt if other budgeting issues haven’t been sorted out yet, while bankruptcy and consumer proposals have long-term implications that need to be understood.
The bankruptcy process generally lasts either nine or 21 months depending on income, and then the bankruptcy stays on public record for six years. A consumer proposal generally lasts five years and then stays on your record for three more. A second and third bankruptcy have much longer terms.
During the bankruptcy process, a trustee will take stock of your assets and income to determine what needs to be sold and what you’re required to pay.
The law allows keeping essentials like clothes as well as a low-valued car and other assets, with rules varying by province. Bankruptcy also requires minimum payments of $200 a month through the process to cover administration costs, and significantly more if your income is above a threshold. For those unable to pay, the fee can be waived in certain circumstances.
If you have a house with a mortgage, you may be able to keep it if your equity in it is small and you can manage the mortgage payments. If your equity is above a threshold, which varies by province, you’d have to find a way to pay that back as well or the trustee would have the power to sell it.
Throughout the process you will also have to report your income and expenses on a monthly basis to the trustee. Any changes in circumstance, such as a raise or inheritance, could increase your payments.
For those who don’t want to go through the bankruptcy process, or want to keep more of their assets, the consumer proposal is less invasive.
While a longer process, it provides more control on keeping assets while still only paying back part of your debts.
Both a bankruptcy and a consumer proposal can cover unsecured credit and debt like credit card debt, unsecured bank loans, back taxes, lines of credit, payday loans and unpaid bills.
However, they will not deal with secured debt like your mortgage, secured car loan or lease. They will also not include debts like spousal or child support, court imposed fines and student loans that are less than seven years old.
The biggest mistake is waiting to talk to someone. Some clients sell off assets they could have kept before approaching her, while others fear they wouldn’t be able to cross the border or that they may go to jail. Debtors’ prison do not exist anymore.
Why Are Mortgage Rates Rising?
Over the past month, the Bank of Canada has lowered its overnight rate by a whopping 1.5 percentage points to a mere 0.25%. Many people expected mortgage rates to fall equivalently. The banks have reduced prime rates by the full 150 basis points (bps). But, since the second Bank of Canada rate cut on March 13, banks and other lenders have hiked mortgage rates for fixed- and variable-rate loans. That’s not what happens typically when the Bank cuts its overnight rate. But these are extraordinary times.
The Covid-19 pandemic has disrupted everything, shutting down the entire global economy and damaging business and consumer confidence. No one knows when it will end. This degree of uncertainty and the risk to our health is profoundly unnerving.
Most businesses have ground to a halt, so unemployment has surged. Hourly workers and many of the self-employed have found themselves with no income for an indeterminate period. All but essential workers are staying at home, including vast numbers of students and pre-school children. Nothing like this has happened in the past century. The societal and emotional toll is enormous, and governments at all levels are introducing income support programs for individuals and businesses, but so far, no cheques are in the mail.
In consequence, the economy hasn’t just slowed; it has frozen in place and is rapidly contracting. Travel has stopped. Trade and transport have stopped. Manufacturing and commerce have stopped. And this is happening all over the world.
What’s more, the Saudis and Russians took advantage of the disruption to escalate oil production and drive down prices in a thinly veiled attempt to drive marginal producers in the US and Canada out of business. This has compounded the negative impact on our economy and dramatically intensified the plunge in our stock market.
Many Canadians are now forced to live off their savings or go into debt until employment insurance and other government assistance kicks in, and even when it does, it will not cover 100% of the income loss. The majority of the population has very little savings, so people are resort to drawing on their home equity lines of credit (HELOCs), other credit lines or adding to credit card debt. Businesses are doing the same.
The good news is that people and businesses that already have loans tied to the prime rate are enjoying a significant reduction in their monthly payments. All of the major banks have reduced their prime rates from 3.95% to 2.45%. So people or businesses with floating-rate loans, be they mortgages or HELOCs or commercial lines of credit, have seen their monthly borrowing costs fall by 1.5 percentage points. That helps to reduce the burden of dipping into this source of funds to replace income.
So Why Are Mortgage Rates For New Loans Rising?
These disruptive forces of Covid-19 have markedly reduced the earnings of banks and other lenders and dramatically increased their risk. That is why the stock prices of banks and other publically-traded lenders have fallen very sharply, causing their dividend yields to rise to levels well above government bond yields. As an example, Royal Bank’s stock price has fallen 22% year-to-date (ytd), increasing its annual dividend yield to 5.31%. For CIBC, it has been even worse. Its stock price has fallen 30%, driving its dividend yield to 7.66%. To put this into perspective, the 10-year Government of Canada bond yield is only 0.64%. The gap is a reflection of the investor perception of the risk confronting Canadian banks.
Thus, the cost of funds for banks and other lenders has risen sharply despite the cut in the Bank of Canada’s overnight rate. The cheapest source of funding is short-term deposits–especially savings and chequing accounts. Still, unemployed consumers and shut-down businesses are withdrawing these deposits to pay the rent and put food on the table.
Longer-term deposits called GICs, which stands for Guaranteed Investment Certificates, are a more expensive source of funds. Still, owing to their hefty penalties for early withdrawal, they become a more reliable funding source at a time like this. As noted by Rob Carrick, consumer finance reporter for the Globe and Mail, “GIC rates should be in the toilet right now because that’s what rates broadly do in times of economic stress. But GIC rates follow a similar path to mortgage rates, which have risen lately as lenders price rising default risk into borrowing costs.”
To attract funds, some of the smaller banks have increased their savings and GIC rates. For example, EQ Bank is paying 2.45% on its High-Interest Savings Account and 2.55% on its 5-year GIC. Other small banks are also hiking GIC rates, raising their cost of funds. Rob McLister noted that “The likes of Home Capital, Equitable Bank and Canadian Western Bank have lifted their 1-year GIC rates over 65 bps in the last few weeks, according to data from noted housing analyst Ben Rabidoux.”
The banks are having to set aside funds to cover rising loan loss reserves, which exacerbates their earnings decline. An unusually large component of Canadian bank loan losses is coming from the oil sector. Still, default risk is rising sharply for almost every business, small and large–think airlines, shipping companies, manufacturers, auto dealers, department stores, etc.
Lenders have also been swamped by thousands of applications to defer mortgage payments.
Hence, confronted with rising costs and falling revenues, the banks are tightening their belts. They slashed their prime rates but eliminated the discounts to prime for new variable-rate mortgage loans. Some lenders will no doubt start charging prime plus a premium for such mortgage loans. Banks have also raised fixed-rate mortgage rates as these myriad pressures reducing bank earnings are causing investors to insist banks pay more for the funds they need to remain liquid.
An additional concern is that financial markets have become less and less liquid–sellers cannot find buyers at reasonable prices. The ‘bid-ask’ spreads are widening. That’s why the central bank and CMHC are buying mortgage-backed securities in enormous volumes. That is also why the Bank of Canada has started large-scale weekly buying of government securities and commercial paper. These government entities have become the buyer of last resort, providing liquidity to the mortgage and bond markets.
These markets are crucial to the financial stability of Canada. Large-scale purchases of securities are called “quantitative easing” and have never been used before by the Bank of Canada. It was used extensively by the Fed and other central banks during the 2008-10 financial crisis. When business and consumer confidence is so low that nothing the central bank can do will spur investment and spending, they resort to quantitative easing to keep financial markets functioning. In today’s world, businesses and consumers are locked down, and no one knows when it will end. With so much uncertainty, confidence about the future diminishes. The natural tendency is for people to cancel major expenditures and hunker down.
We are living through an unprecedented period. When the health emergency has passed, we will celebrate a return to a new normal. In the meantime, seemingly odd things will continue to happen in financial markets.
Dr. Sherry Cooper
DR. SHERRY COOPER
Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.
You have fallen on hard times. You were out of work for a few months, You had to take time off to look after an ailing relative, You got injured at work and did not have disability insurance.
Basically You have not been able to meet your mortgage payment obligations and have fallen behind missing multiple mortgage payments.
The bank has sent you letters demanding that you get your payments up to date but you simply have not been able to.
Things escalate and the bank refers their mortgage file over to their high paid lawyers.
The lawyer now sends you a letter stating that you are in default and that the bank is beginning power of sale proceedings.
Now not only do you owe your regular payments to the bank but their administration fees and lawyers fees plus interest is being added to all of this compounded. This starts to add up very quickly. Lawyers know how to bill.
Your choices are to take control and list your house for sale as quickly as possible reducing these extra administration fees.
If you are lucky you are able to sell your home and payout the mortgage and extra expenses before there is no equity left.
At this stage you regroup, perhaps rent or if there is enough equity purchase another more affordable home. More than likely your credit is shot but if you have enough of a down payment you can still qualify for a mortgage at rates that may be 1 to 2% higher than the best rates.
you put the cash in the bank and rent until things improve.
You have the possibility of paying out the lender with a new lender mortgage.
The other option is the bank takes control and lists your house under power of sale. They obtain two appraisal (at your cost) and provide their listing agent the listing. The listing agent makes note on the listing that the house is being sold under power of sale with no warranty. A feeding frenzy is about to begin that will most likely drive the price of your home down.
Once it is sold and all fees deducted you may be lucky enough to get some equity paid to you that is left over.
How do I pay for everything? I am finding it hard to budget, enjoy life and get ahead! How Can I afford to buy my first home?
This is a burning question and stressful feeling inside most of us.
In order to help you understand and put perspective on this a little better I put together the following scenario:
Assuming a New home Purchase of $500,000 that includes a Self contained apartment.
Using the Stress Test – 5% down payment,
Home owner incentive,
Renting the upstairs – $1500 per month
credit score above 680 ( no outstanding debts)
Household Income of approximately $90,000 will allow you to purchase for up to $500,000 with a little wiggle room depending on the lender and their rental offset calculation.
Qualifying using 39/44% debt service ratios
The more money your household brings in the larger the purchase price can be provided you have the saved down payment.
Now you ask yourself is this realistic. Each waking hour you are presented with ways to spend your hard earned income and you wonder if you can afford it and how it will impact your future.
I really like my Starbucks Grande Chai Tea latte at $4.25 x 3 per week I really like a half bottle of Chianti after work at $10 per half bottle or three Bud Lights before the game. X 5 week
I really like my afternoon Tim Hortons with soup and sandwich at $10 x 5 per week
My trip to Marshalls or Winners just cost me $50 x 1 per week
A dinner out at the Keg is $100 x 2 per week
Gas for my car at $70 per week
Groceries, Daily health items, Insurance, car payment, Rent, heat, cable TV, Netflix, Crave TV, movie rental add up to approximately $2,700 per month
Does the above sound familiar to you?
All in all the above totals $3,831 per month AFTER TAX DOLLARS of $45,972 per year.
This means you have to earn approximately $65,000 per year gross before income tax to afford the items listed above.
If you are earning $90,000 before tax you should be able to put aside approximately $10,000 per year towards the down payment taking you approximately 4 years to save up the appropriate down payment. Remember to put these savings into an RRSP to take advantage of the First time home buyer RSP incentive. Known as the Home Buyers Plan RSP.
Assuming your income and home prices increase equally with inflation.
If it is a condo you are looking to buy the Condo fee has to be calculated into the affordability.
It is complicated but possible.
With the help of a mortgage professional to run your own personal scenario we can make sure you obtain the dream of home ownership.
Contact your local mortgager agent to provide you with your own personal outline.
Picture this…Its a hot market with multiple offers on limited supply. Your Real Estate Agent advises that without an unconditional offer you will have no chance of winning the bid on the new home. You know that you cannot purchase the home unless your home is sold but you take a chance believing that your home will sell quickly and at the price your agent is advising. The odds are in your favour but if the economic timing is off you could lose big.
Your unconditional offer is accepted and now you go about listing your home for sale.
Happy ending – Your home sells and you only require bridge financing to bridge the gap on the closing date. Unhappy ending 2) . The bottom of the market falls out, or the government makes a mortgage rule change and you are unable to sell your home at the price you need to have enough equity to purchase the new home or the qualifying criteria for the new mortgage puts you in a situation where you no longer qualify.
An Ontario Court of Appeal delivered an expensive lesson to a GTA homebuyer who made an unconditional offer that was later retracted.
Back in 2017, Shahla Sheikhtavi had made an unconditional offer on an East Gwillimbury, Ontario, home for $1,871,000. Following the introduction of the province’s 15% Non-Resident Speculation Tax (NRST), Sheikhtavi found herself in the midst of a market downturn and unable to sell her current home to obtain mortgage financing for her new purchase.
After rescinding her offer, property owners Richard and Sylvia Perkins were forced to re-list their home for $1.251,888—nearly $620,000 below the original offer.
A lower Ontario court ordered Sheikhtavi to pay damages of $619,112, despite pulling out of the purchase offer. She appealed the judgment and just last month an Ontario Court of Appeal sided with the lower court and ordered the original payment, plus $15,019 in legal costs.
“In this case, the appellant deliberately chose not to include a condition that she had to be able to sell her home and obtain mortgage financing before closing as a term of her offer to purchase,” the court wrote in its judgment.
“She would reasonably have known that there was a risk her home would not sell at the price she sought but made an unconditional offer to purchase the respondents’ home because she wanted her offer to be accepted (although she was not the highest bidder)…The appellant’s contract was not frustrated; it was breached by the appellant.”
It was an expensive lesson for this homebuyer, but one that other buyers should take into consideration when making unconditional offers.
Buyers can’t rely on “supervening events” like mortgage regulations or regional foreign homebuyer taxes to provide grounds for backing out of a mortgage contract,” noted Brendan Monahan of Babin Bessner Spry in a review of the case.
“However, because the appellant’s offer was not subject to any conditions, the announcement of the NRST (however unexpected it may have been) did not force the appellant to do something different than what she agreed to.”
Buying a Unique property can come with financing hardship.
Thinking of buying a romantic rustic Log home? A Home with acreage? A house with a large workshop? Or what about a fixer upper?
All of these types of properties can cause challenges when it comes to the mortgage financing.
Finding the right lender will take extra time, may require large down payments or may not be suitable at all to some banks.
For example; It is a general requirement that If the property you are purchasing has more than 5 acres the lender will request that the appraiser adjust the value of the property to reflect only the house and 5 acres. You will be required to come up with the difference in cash to close.
If the home has a large outbuilding that would not be considered a typical garage the lender will request that this be deducted from the property value or purchase price requiring you to come up with the difference in cash.
If buying a home that is described as being a Fixer upper the bank may require a quote for the repairs and then will holdback those funds from the mortgage until the work is proven to have been completed. (note: it is possible to include the extra renovation money into the new mortgage through the mortgage default insurer)
Make sure you are preapproved and before presenting your offer and send your broker a copy of the MLS listing for their review so they can advise you on the amount of time required for financing and any pitfalls that may be present or a strategy to make sure the funding of the mortgage happens smoothly.
Did you know that if you are recently Divorced or Separated, Have not owned a home in 4 years or have never owned a home before you are qualified as a First Time Home buyer and the privileges that come with it.
The RRSP Home Buyers’ Plan:
With the federal government’s Home Buyers’ Plan, you can use up to $35,000 of your RRSP savings ($70,000 for a couple) to help finance your down payment on a home.
To qualify, the RRSP funds you’re using must be on deposit for at least 90 days. You must also provide a signed agreement to buy or build a qualifying home.
The best part is the withdrawal is not taxable as long as you repay it within a 15-year period. The payback amount is at least one-fifteenth a year of the amount you withdrew from your RRSP. So make sure you set up an RSP-Matic®, an automatic monthly, bi-weekly or even weekly contribution to your RRSP, to ensure you do not miss any repayments!
Breakdown of a Marriage or Common-Law Partnership
Generally, you will not be prevented from participating in the HBP if you do not meet the first-time home buyer requirement, provided that you live separate and apart from your spouse or common-law partner for a period of at least 90 days as a result of a breakdown in your marriage or common-law partnership. You will be able to make a withdrawal under the HBP if you live separate and apart from your spouse or common-law partner at the time of the withdrawal and began to live separate and apart in the year in which the withdrawal is made, or any time in the four preceding years. However, in the case where your principal place of residence is a home owned and occupied by a new spouse or common-law partner, you will not be able to make an HBP withdrawal under these rules.
You will be required to dispose of their previous principal place of residence no later than two years after the end of the year in which the HBP withdrawal is made. The requirement to dispose of the previous principal place of residence will be waived if you buy out the share of the residence owned by your spouse or common-law partner. The existing rule that individuals may not acquire the home more than 30 days before making the HBP withdrawal will also be waived in this circumstance.
Existing HBP rules will otherwise generally apply. For example, your outstanding HBP balance must be nil at the beginning of the year in which you make an HBP withdrawal.
This measure applies to HBP withdrawals made after 2019.
First Time Home Buyer Down Payment Incentive Program:
With this incentive, Government of Canada provides:
5% or 10% for a first-time buyer’s purchase of a newly constructed home
5% for a first-time buyer’s purchase of a resale (existing) home
5% for a first-time buyer’s purchase of a new or resale mobile/manufactured home
The incentive is available to first-time homebuyers with qualified annual incomes of $120,000 or less. A participant’s insured mortgage and the incentive amount cannot be greater than four times the participant’s qualified annual income.
Caution: It would be my advice to pay back this loan/incentive before renovating otherwise the Government will benefit in your increase in value to the home due to your renovations
Ontario Land Transfer Tax Rebate: $4000
First-time homebuyers in Ontario can qualify for a rebate equal to the full amount of their land transfer tax, up to a maximum of $4,000.
To qualify for the Ontario Land Transfer Tax Refund for First-Time Homebuyers, you must meet the following criteria:
- You must be a Canadian citizen or permanent resident of Canada,
- You must be 18 years of age or older,
- You must live in the home within 9 months of purchasing it,
- You cannot have owned a home before, and
- If you have a spouse, they cannot have owned a home during the time they have been your spouse.
First Time Home Buyer Tax Credit – Save up to $750
The FTHB Tax Credit offers a $5,000 non-refundable income tax credit amount on a qualifying home acquired after January 27, 2009. For an eligible individual, the credit will provide up to $750 in federal tax relief.Jun 17, 2019
Does the HBTC affect A FTHB eligibility for the Home Buyers’ Plan?
Luckily, it doesn’t! The First-Time Buyers’ Tax Credit and Home Buyers’ Plan aren’t mutually exclusive programs. You’re eligible to claim and benefit from both.
Through the borrowed down payment plan available through us you can qualify to purchase with 100% financing
This applies to new and existing home purchases that are owner occupied with no more than 2 units.
Our plan will allow you to borrow against a line of credit, loan or credit card that can be used for the 5% down payment. The balance of the purchase price would be obtained as a standard mortgage at best industry rates.
We would use the monthly repayment of the borrowed funds in your overall total debt service ratios and provided they meet the minimum guidelines you are approved!
Another option would be to simply obtain a gift from a family member for the 5% down payment. A gift letter template and proof of deposit of the gift would be the documents required for underwriting.