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The mortgage dilemma: what to do if you can’t afford to make your payments

What are your mortgage payment options when you’re fresh out of options and cash flow?

As interest rates continue to rise, it’s an unfortunate reality facing a number of homeowners.

In fact, according to a recent survey, 1 in 4 Canadians say they will have to sell their home if rates should go up any further. While 18% of mortgage holders are already finding themselves in a position of not being able to afford their monthly payments.

But that’s worst-case scenario.

Since interest rates have been climbing over the past year or so, these are ways you can better prepare yourself to handle the financial load.

Here are 4 possible solutions if you suddenly find yourself facing a mortgage payment dilemma:

#1: Extend your amortization period.

Your monthly mortgage payment is determined by a combination of your initial down payment, your mortgage term (the length of time you are committed to a particular interest rate/lender), and your amortization period (up to 25 years for CMHC-insured mortgages; up to 30+ years for non-insured mortgages). By extending your amortization period, you’re in effect taking longer to pay down your mortgage—which will decrease your monthly payments.

Keep in mind the ability to stretch your mortgage over a longer time horizon entirely depends on:

  • Your lender (if you have a renewal coming up, now’s the time to talk to them about this)
  • How far you are into your amortization period (i.e. if you’re a new mortgage holder, chances are you won’t have the extension room to make this a feasible option)

Find out how much of an impact extending your amortization period will have on your monthly mortgage payments.

#2: Consolidate credit cards and loans to free up cash flow.

Juggling high-interest debts outside of your mortgage could be another reason your finances are being stretched too thin. Consider consolidating those balances to reduce the number of monthly debt/interest payments. This will free up more of your cash flow to cover essential expenses, such as your mortgage- without necessarily having to make more money.

Credit options to avoid at all costs:

  • Payday loans (these come with the highest fees and interest rates)
  • Cash advances from credit cards (these have a tendency to max out credit limits all-too quickly)
  • Advance-fee loan schemes (where people are asked to pay money upfront before receiving any funds—it’s a total scam, don’t do it)

Learn more about our borrowing options, exclusively for education members.

#3: Consider taking on roommates/tenants.

If you’re hesitant about extending your amortization period or utilizing a line of credit, you may want to look into boosting your monthly cash flow instead. Rental income is one of the easiest ways to do this. Bringing in roommates to fill any unused bedrooms (or tenants, if you have the space for a basement apartment) could provide the extra money you need to cover a portion or even all of your mortgage payments.

A few rental income tips:

  • Do your landlord/tenant legislation homework, as municipal bylaws differ with each city/town/region
    (check out the Canada Housing and Mortgage Corporation website for more information)
  • Use the Residential Tenancy Agreement (Standard Form of Lease) to create a contract between you and the tenant-this will protect both parties
  • Inform your home insurance provider about your rental unit (not telling them could void your policy in the event of a fire or other damage caused by your roommate/tenant)
  • Beware of the tax implications, as all rental income must be claimed on your tax return

Looking for other ways to boost your cash flow? Here are 5 tips for saving up to $500 a month.

#4: Rent out your home or sell and downsize.

This can be one of the hardest things to consider. However, if the bills are adding up faster than you can pay them off, perhaps it’s time to eliminate your biggest financial obligation (your mortgage)—at least for the time being.

You have two options on this front:

  • Rent out your home: With this option, you would move out; then somebody else would move in and pay you rent. You would retain full ownership, which means all costs attributed to the home (i.e. mortgage, property tax, etc.) would still be your responsibility. However, you could set the monthly rent to cover these costs (which would then be paid by your tenants). There are of course added responsibilities to being a landlord, above and beyond being a homeowner (such as having to immediately look after any repairs/issues, as well as tax implications, etc.). You would ultimately have to weighs the pros and cons of going this route and then decide whether it’s your best course of action.
  • Sell/downsize: Depending on how much equity you have in your home, selling would afford you the ability to pay off all of your debt and provide you with enough of a financial cushion to regroup. You could even invest a portion of the proceeds (of the sale of your home) into something like a TFSA. This money would then grow over time and be instantly accessible for when you’re in a better position financially to buy your next home. Finally, if you don’t have any other choice but to sell, remind yourself that this is only temporary. Your situation will improve. You will own again.

At the end of the day, Educators Financial Group understands that your home is everything to you.

If you’ve been feeling the financial pinch as a result of inflation and rising interest rates, reach out to us. No matter where you are on the pay grid or what your pension income is in retirement, we can review your financial situation and provide guidance on how to financially navigate through these tough times.

Have a renewal coming up? What other options do you have? Let’s talk about your mortgage.

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