Unimor Capital Corporation

Tag: refinancing

  • Consumer Proposal vs Bankruptcy: The Impact on Mortgages

    Consumer Proposal vs Bankruptcy: The Impact on Mortgages

    Dealing with financial difficulties can be a daunting and overwhelming experience. In Ontario, individuals facing financial distress have several options to consider, two of which are consumer proposals and bankruptcy. These are legal processes that can help individuals manage their debts and regain financial stability. However, they have distinct differences, particularly when it comes to existing mortgages. In this article, we will delve into the disparities between consumer proposals and bankruptcy and explore what they mean for individuals with existing mortgages.

    Consumer Proposal: A Lifeline to Financial Recovery
    A consumer proposal is a formal arrangement between a debtor and their creditors, governed by the Bankruptcy and Insolvency Act (BIA) in Canada. It is an attractive option for those who are unable to meet their financial obligations but wish to avoid declaring bankruptcy. Let’s explore the key aspects of a consumer proposal and how it interacts with existing mortgages.

    1. Debt Reduction and Repayment
    A significant advantage of a consumer proposal is that it allows debtors to negotiate with their creditors to reduce the total amount of debt owed. Debtors work with a Licensed Insolvency Trustee (LIT) to create a proposal that outlines a feasible repayment plan. Creditors vote on whether to accept the proposal, and if the majority agree, it becomes legally binding.

    Regarding existing mortgages, consumer proposals typically do not directly affect secured debts like mortgages on real property. Your mortgage remains intact, and you are still responsible for making regular mortgage payments. However, by reducing your unsecured debts through the proposal, you may free up more of your income to meet your mortgage obligations.

    2. Protecting Assets
    Consumer proposals offer a significant advantage when it comes to protecting assets, including your home. In Ontario, the ‘homestead exemption’ allows individuals to keep their primary residence during bankruptcy, provided it falls within certain equity limits. However, consumer proposals do not have the same equity restrictions.

    If you have an existing mortgage on your home, a consumer proposal allows you to maintain ownership and continue making mortgage payments without the risk of losing your property. This can be especially beneficial for individuals who are committed to keeping their homes and want to find a structured way to manage their other debts.

    3. Impact on Credit Score
    While a consumer proposal has a more favorable impact on your credit score compared to bankruptcy, it will still have a negative effect. A consumer proposal remains on your credit report for 3 years after you complete it or 6 years from the date it was filed, whichever comes first. This can make obtaining new credit or refinancing your mortgage more challenging during that period.

    However, many individuals who opt for a consumer proposal are already struggling with their credit due to existing debts. Over time, as you make consistent mortgage payments and demonstrate responsible financial behavior, your credit score can gradually improve.

    4. Process Duration
    A consumer proposal typically spans over a maximum of 5 years, during which you make fixed monthly payments as outlined in the proposal. Once you successfully complete the proposal, you are considered debt-free, with the exception of any ongoing secured debts, such as your mortgage.

    Bankruptcy: A Last Resort with Significant Consequences
    Bankruptcy is a legal process that allows individuals to discharge their debts when they are unable to meet their financial obligations. It is generally considered a last resort due to its severe consequences. Let’s explore how bankruptcy differs from a consumer proposal and how it affects individuals with existing mortgages.

    1. Discharge of Debts
    In bankruptcy, most unsecured debts are discharged, meaning you are no longer legally obligated to repay them. However, this discharge does not apply to secured debts, such as mortgages. If you have an existing mortgage when you declare bankruptcy, you must continue making your mortgage payments to avoid foreclosure.

    2. Asset Liquidation
    One of the major differences between bankruptcy and a consumer proposal is the treatment of assets. In bankruptcy, a trustee may liquidate non-exempt assets to repay a portion of your debts. However, Ontario has exemptions in place to protect certain assets, including your primary residence (homestead exemption) up to a specific equity limit. If your home’s equity exceeds this limit, you may be required to sell it to satisfy your creditors. It’s crucial to consult with a bankruptcy trustee to assess your specific situation.

    3. Impact on Credit Score
    Bankruptcy has a more severe impact on your credit score compared to a consumer proposal. A first bankruptcy typically remains on your credit report for 6 years after your discharge, while a second bankruptcy can stay on your record for up to 14 years. This can make it challenging to secure new credit or refinance your mortgage during this time.

    4. Process Duration
    The duration of bankruptcy varies depending on your financial situation and whether it’s your first or subsequent bankruptcy. A first bankruptcy usually lasts for nine months, but it can be extended to 21 months if you have surplus income. Subsequent bankruptcies can last for 24 to 36 months. During this period, you must adhere to the rules set by the Office of the Superintendent of Bankruptcy (OSB) and continue making your mortgage payments.

    Existing Mortgages in Bankruptcy and Consumer Proposals
    Regardless of whether you choose a consumer proposal or bankruptcy, your existing mortgage remains a secured debt, and you are obligated to keep making regular payments. Failure to do so can lead to the lender initiating foreclosure proceedings, which may result in the sale of your home to cover the outstanding mortgage balance.

    However, there are some additional considerations regarding mortgages in these processes:

    Mortgage Arrears
    If you are already behind on your mortgage payments when you enter a consumer proposal or declare bankruptcy, it’s essential to address the mortgage arrears promptly. Both processes can provide a structured framework for managing your overall debt, which may free up funds to address your mortgage arrears.

    Refinancing & New Mortgages
    During the term of a consumer proposal, obtaining new credit, including refinancing your existing mortgage, can be challenging. Lenders may view you as a higher risk due to the proposal’s impact on your credit score. However, it’s not impossible to refinance or obtain a new mortgage after completing a consumer proposal. You may need to work with a mortgage broker who specializes in assisting individuals with credit challenges.

    In contrast, obtaining a new mortgage or refinancing during or immediately after bankruptcy can be even more challenging. Lenders typically prefer to work with borrowers who have reestablished their credit and have a stable financial history.

    Communicate with Your Lender
    Whether you choose a consumer proposal or bankruptcy, it’s crucial to maintain open communication with your mortgage lender. Inform them about your financial situation and the steps you are taking to address your debts. Some lenders may be willing to work with you to find a solution that helps you keep your home.

    What This Means for You?
    Facing financial difficulties can be overwhelming, but there are options available to help you regain control of your finances. Consumer proposals and bankruptcy are two distinct paths with different implications for individuals with existing mortgages.

    A consumer proposal offers a structured way to reduce and manage your unsecured debts while protecting your assets, including your home. Your existing mortgage remains intact, and you must continue making regular payments.

    On the other hand, bankruptcy is a more drastic step that discharges most unsecured debts but may require you to liquidate non-exempt assets if applicable. Your existing mortgage remains a secured debt, and you must continue making payments.

    Both processes have consequences for your credit score, and it may take time to rebuild your financial standing. Regardless of your choice, it’s essential to seek professional guidance from a Licensed Insolvency Trustee or Bankruptcy Trustee to navigate these complex financial decisions and ensure the best possible outcome for your unique circumstances. Additionally, maintaining open communication with your mortgage lender is key to protecting your home and working towards a more stable financial future.

  • The New 2018 Mortgage Rules

    The New 2018 Mortgage Rules

    What are the 3 new 2018 mortgage rules?

    It’s going to get a lot harder for some home buyers to get a mortgage in 2018. That’s because the Office of the Superintendent of Financial Institutions (OSFI, Canada’s banking regulator) introduced three new rules on mortgage lending that takes effect in 2018 and the new rules will hit first-time home buyers and those thinking of refinancing their homes the hardest.

    1. Stress Test
      Starting on January 1, 2018, the OSFI has set a new minimum qualifying rate, or ‘stress test’ for all prospective home buyers, even those with a down payment of over 20%. Before the new, tougher rule, only buyers that had a down payment of less than 20% had to make sure they could pass a stress test. Regardless of how much money you save for a down payment, if you don’t pass the new stress test, the bank won’t give you a mortgage.Under the new mortgage stress test, potential home buyers need to qualify for a mortgage at a rate that is the greater of two indicators: either 2% higher than the mortgage rate they qualified for, or the Bank of Canada’s 5 year benchmark rate, which is currently at 5.14%. Before the new stress test, home buyers or owners qualified at the rate offered by the lender. The actual mortgage payment will still be paid at the negotiated rate, but a higher calculation is used for qualifying purposes.
    2. Enhanced Loan-To-Value Measurements
      Traditional mortgage lenders (Canada’s big banks) need to ensure the Loan-To-Value (LTV) ratio remains “dynamic.” That means it needs to be adjusted to local market conditions. The OSFI insists that lenders (excluding private lenders) have internal risk management protocols in higher priced markets, like Toronto and Vancouver. A LTV ratio is a number that describes the size of a loan compared to the value of the property.Canada’s big banks use the LTV ratio to determine how risky a loan is; the higher the LTV ratio the greater the risk. For example, if property values decrease following a housing bubble, the LTV ratio could actually rise and be higher than the total value of the property. In which case, it’s quite possible that you have negative equity in the house.
    3. Restrictions Placed on Certain Arrangements to Avoid LTV Limits
      Mortgage lenders (again, this does not include private lenders) are not allowed to arrange a mortgage or other financial product with another lender that gets around the maximum LTV ratio or other limits placed on residential mortgages. If you apply for a mortgage with a LTV ratio of 80% and the lender can only approve you for 60%, in the past, the lender could partner with a second lender for the additional 20%, bundle it together to get a complete LTV loan of 80%. Traditional lenders cannot do this anymore.

    What does this mean for homebuyers and sellers?

    The three new mortgage rules that kick in as of January 1, 2018 will hurt the fastest growing segment of Canada’s mortgage market—uninsured mortgages. That’s one out of every six prospective homebuyers in the country.

    The strict stress test, which is meant to ensure borrowers can afford to pay their mortgage at a higher rate, is now being applied to all home buyers, even those with a down payment of 20% or more. Once the tests are in place, it is estimated that it could lower a family’s purchasing power by up to 21%.

    Economists say the stricter mortgage rules will also negatively impact softening housing markets across the country. It is expected the tougher mortgage rules, once fully implemented, will depress housing demand by up to 10%.

    If you’re a homebuyer and want to refinance a mortgage, the new mortgage lending rules will be a lot more difficult to negotiate.

    Should you be worried?

    If you’re a first-time home buyer, the stricter mortgage lending rules mean you might need to rent for a little longer or wait until your income increases before you can buy a home. Because the purchasing power does not go as far as it once did, first-time home buyers might need to consider something besides a detached house—a townhouse house or a condo. Or, first-time homebuyers may need to get a co-signer to qualify under the strict new rules.

    There are other options though. Keep in mind; the stricter mortgage lending rules only apply to those homebuyers looking to secure a mortgage with one of Canada’s federally regulated mortgage lenders, which does not apply to private mortgage lenders.