Not Paying – Not Simple
Posted January 11th, 2010 in Real Estate, Sharing the Experience | 
Think Twice
Sticking your head in the sand when it comes to understanding your mortgage is not necessarily the best answer. You’ve heard it before and it’s ironic when you consider that buying a home may be the largest asset you purchase and yet the odds are that you may know more about where your shoes were made than you do about the terms and conditions of your mortgage agreement.
You Are Not Alone
There seems to be a little bit of confusion about exactly what happens if you default on your mortgage. Reviewing the Strategic Mortgage post some people have chimed in to share a greater perspective of some differences.
It seems we here in British Columbia are not as fortunate as those folks in Saskatchewan and Alberta. If the understanding of the law is clear, it appears that we citizens of British Columbia just can’t drop the house keys on the bank manger’s desk and walk away. It ain’t that simple!
Reviewing a mortgage disclosure statement (not the mortgage document) reveals the following:
LATE PAYMENTS AND DEFAULT CHARGES
| Mortgage in Default | This includes when you are late making a regular mortgage payment or when you do not make a scheduled payment. Your mortgage can also be in default for other reasons, such as failing to maintain adequate fire insurance on the property. The Mortgage Contract states all the ways in which your mortgage may be in default. |
| Interest Owing | If a regular mortgage payment is late, we calculate the extra interest you owe for being late every day, using the annual interest rate of your mortgage. You pay interest on both the principal and interest portion of the payment that is late., When we receive the next payment, we will deduct the interest charges for the late payment and the interest owing on the principal amount first, before any part of the payment is applied to reducing the principal amount. We may also decide to apply the late payment to other amounts you may owe, for example, property taxes. |
| Default Charges | If your mortgage is in default for any reason, you will have to pay any or all of these amounts: - the missed mortgage payment - interest on the principal and interest amount of the missed mortgage payment, as described in this section - legal fees and disbursements resulting from any action we may take or which is taken on our behalf to collect the amount owing - costs, including legal fees and disbursements, we may incur or which are incurred on our behalf to protect the property or to take action under the terms of the Mortgage Contract - any amount charged to you according to the Mortgage Contract, and - interest at the mortgage rate for any costs charged to you according to the Mortgage Contract. |
| Calling the Loan | If you are in default, we can also call the loan and require you to pay immediately everything you owe according to the Mortgage·-Contract |
Things to Ask Yourself
Did you insist on taking the time to completely read your mortgage document before you signed on the line? Supposition is that you and many others don’t as it contains a lot of legalize and rightly, you trust your bank and lawyer for guidance.
Next question – do you have a true copy of mortgage contract? Based on some phone calls to banker types the probability is that you don’t. I searched my private files and found (I hate to admit this failure on my part but, I don’t either) so in making those banker calls I asked why I never got a copy.
A somewhat glib and unsatisfactory answer was that the true copy is registered at land titles and is available there should I choose to have a copy made available. Why this happens I am at this point in time not sure but, it struck me odd that I don’t recall being offered a copy. Check and see if you have yours. Based on the answers I got from these bank managers I’ll go out on a limb and with equal glibness and say: “I bet you don’t have your mortgage contract either.”
This presents a problem which simply is that since I don’t have a mortgage document from which to refer, it leaves this post short because I can’t outline ‘all the ways in which your mortgage may be in default.’ 
Reflections
Here is some ‘lite’ reading that might help shed some light.
- AGF’s Standard Mortgage Terms – Terms, and structure of a mortgage
- B.C. Law Society Check List – what your lawyer should be doing in drafting the document
- Mortgage Enforcement in British Columbia by Andrew Bury, Gowling, Lafleur Hendersen LLP Vancouver – an outline of how the bank manages a default.
- CHAPTER TEN: CREDITORS’ REMEDIES AND DEBTORS’ ASSISTANCE – it’s a little legal in nature but it gives you some idea that there is a lot more to all of this default business then just handing over the keys – it can get complicated.
*Disclaimer: It needs to be made clear that information provided herein by YatterMatters and or Larry Yatkowsky is not a represention nor an offering of legal opinion, advice or recommendation of any kind which can be relied upon for your personal legal circumstance. Should you require such advice it is strongly recommended and encouraged that you seek appropriate professional counsel.
You should add a “definition” section to this topic and add one term:
Recourse mortgage: The debtor is responsible for any deficiency balance after foreclosure of the property. This includes:
- balance of mortgage left after sale proceeds are applied
- land transfer tax
- lawyer fees
- interest on deficient balance
The lender has many options to seek repayment:
- garnish wages
- seize assets
The only solace is that RRSPs are protected, so if you’re underwater and behind payments, sell everything and stash the money in your RRSP before the bank starts the foreclosure process.
Aside from the RRSP, the last remainining option is bankruptcy however, that is another can of worms.
Its also not a valid can of worms for many unless they’ve lost their jobs. To declare bankruptcy you have to pass an income test, if you’ve above it you have to enter a structured repayment scheme, if you’re below it you can declare trust bankruptcy.
Even if rates go up, it’ll be hard to pass this income test if you have the same income you did when purchasing the house. It would need to be significantly lower, or none at all.
In Canada a trustee works with you on this and analyzes your monthly costs. Thus it is hard to declare bankruptcy if you’re living a yuppy lifestyle that’s not affordable. The trustee will put you on a budget, monitor it, and ensure you’re making the repayments.
We all like to think bankruptcy is a way out cause of what we see in the US, yet their bankruptcy rules are very different, and much easier to declare bankruptcy and harder for lenders to pursue you.
Thank you. I have recently began to read up on mortgages, and articles like this are really help full. Another article which is quite useful, gives more of a insight into the economics of mortgages as well as Canadian realty in general.
Larry, I’ve recently viewed a house that was empty of all contents and the house was under foreclosure. I couldn’t quite get all the info from the realtor but the house was being sold by HouseCo Ltd.
Can you give me an indication if that’s usually how the bank sets up the foreclosure or who might this Houseco ltd. be?
If I do a title search would it give me more details of who actually has possesion of this house?
Any input you might have would be appreciated.
@Johnny0
“couldn’t quite get all the info from the realtor” – why not?