10 Steps to Take if You Can’t Afford Your Mortgage

Higher interest rates are burning mortgage borrowers, but what happens when you can’t afford your next monthly payment? Wahi speaks to financial experts for advice.

By Josh Sherman | 3 minute read

Selling your home because you can’t afford the carrying costs should be the absolute last resort.

It’s not easy out there right now for Canadian mortgage borrowers. Since March 2022, the Bank of Canada has hiked its overnight policy rate 10 times, bringing it from 0.25% up to 5%. These increases have left many homeowners with stretched budgets as they’re on the hook for thousands of dollars more in mortgage payments per year.

“It is a tough time,” says Elan Weintraub, co-founder and director at Mortgage Outlet, an independent brokerage. “There are a lot of people in this scenario, and it’s stressful and tough,” he says. In the worst-case scenarios, borrowers are confronted with the prospect of losing their homes. However, depending on personal circumstances, those who are afraid of going underwater on their loans often have a number of options at their disposal before having to give up their property. Wahi turned to Weintraub and other experts to find out more about what homeowners can do if they can’t afford their homes any longer.

1. Take Time to Reflect 

Don’t do anything impulsive, and also realize there is no magic solution to financial problems. “We should take take a very big-picture view, and the first thing that anyone needs to do is to do some self reflection and just ask themselves, ‘How important actually is owning a home for me, versus having quality of life in other areas?’” Anita Bruinsma, founder of Clarity Personal Finance, tells Wahi. “Obviously, if you’re stretched on your mortgage payment, you’re going to have to make sacrifices and that means a different kind of life than you’re used to,” says Bruinsma, who holds a chartered financial analyst (CFA) designation. “Certainly talking with a financial coach or financial planner is helpful.” 

2. Look for Ways to Boost Your Income 

Weintraub generally breaks down the problem of struggling to meet mortgage payments into two buckets: revenue and expenses. We’ll address the latter in a moment, but in terms of revenue, it really boils down to finding ways to increase your income. “Can you rent out your basement? Can you get a side gig? Drive Uber. Paint houses. Do something on the side to boost your income,” says Weintraub, who also suggests asking your employer for a raise, if possible. In terms of renting out a basement, you could also consider moving into the basement and renting out the rest of the house for more rental income. “Those are the revenue levers,” he explains.  

3. Spend Less  

On the expenses side of the equation, Weintraub talks about reevaluating how you spend your money on a day-to-day basis: “Are you going to Starbucks every day and having a $7 latte? Do you go out to eat? Do you go on vacation? Can you go camping instead of going on a plane?” Trimming discretionary spending can help if you’re a few hundred dollars short each month. But it’s likely not enough in more serious scenarios, Bruinsma cautions. “When you’re in… a more dire situation, cutting back on little things like eating out and buying fewer clothes or whatever — that’s probably not going to cut it. You’re not going to find $1,000 a month unless you’re spending excessively.” (An exception is if you’re leasing a car and can live without it.)

4. Extend the Amortization Period  

The most common amortization period in Canada is 25 years. Amortization is the length of time a borrower will be paying off a loan — but it’s not always set in stone. For example, if a homeowner has been making mortgage payments for five years, their original amortization should have decreased by the same number. In that case, there could be the opportunity to bump the amortization period back up to 25 or 30 years. Doing so brings down monthly mortgage payments, although the borrower pays more towards interest over time. Note: This isn’t really a viable option for more recent borrowers who have less wiggle room in terms of extending the amortization period. “In general, it’s not going to work for a more recent buyer. Maybe if they put a massive downpayment or something like that, but for the typical most-recent buyer, I don’t think that’s going to help.” 

5. Get an Unsecured Line of Credit  

Make no mistake: Taking out an unsecured line of credit is not a sustainable long-term solution. But it could be a short-term fix to cover immediately looming payments. “You could potentially borrow money just to manage your cash flow in the short-term,” says Weintraub. “That’s just to solve the very acute and short-term problem that you’re facing,” he adds. For example, if you’re expecting a bonus in the coming months or perhaps starting a new job in the not-too-distant future, this additional loan could help you avoid unnecessarily missing a mortgage payment or two. “Unfortunately, you’re borrowing money at a higher rate to pay down a lower rate,” notes Weintraub. Worse yet, using an unsecured line of credit to float finances for more than a few months runs the serious risk of adding to a borrower’s woes. “You could just end up with even more debt and you still have the same problem,” says Bruinsma. 

6. Ask the “Bank of Mom and Dad” for Help  

“Another idea is to borrow money. Borrow money — I hate to say it — from parents,” says Bruinsma. Many first-time have already received help from parents when purchasing a home, she notes. One 2020 survey even suggests 90% of first-time buyers in BC got a hand from parents. “If your parents didn’t do that for you but they are in a position to do it, this is probably the time to ask for that money,” she says. “That money can be a loan and then you want to agree to the loan terms. It could be a straight-out gift, or it could be an early inheritance.” Bruinsma acknowledges that it can be difficult to discuss an early inheritance but that it might be the best solution sometimes.

7. Sell Other Assets 

Whether it’s a hard asset, like a secondary property, or a soft asset, like stocks, anything is hypothetically on the table. However, be aware of the tax implications. For example, in both the case of selling a cottage or some stocks, you’ll have to pay tax on the capital gains. That said, selling certain assets can have the added benefit of helping you reduce overall monthly spending moving forward. For instance, say you sold a Sea-Doo or a boat. You’d also be canceling your insurance, marina fees, and associated upkeep and gas expenses. “It’s not just selling the asset, it’s changing your lifestyle… to eliminate all of those extra costs,” says Bruinsma.

8. Dip Into Your Savings 

“Dipping into your savings is definitely an option for those people who are only short a little bit every month, and it’s not super-drastic,” says Bruinsma. However, she realizes that many younger to middle-aged Canadians don’t have much in the way of rainy-day funds. That raises concerns for the Clarity Personal Finance founder. “So then the temptation is to dip into the retirement fund, and this is where I would get very, very cautious and very nervous, particularly if those funds are sitting in an RRSP,” she says. For one, any money you take out of a Registered Retirement Savings Plan is considered taxable income, but that’s not all. “Of course, you’re sacrificing your future,” Bruinsma points out. “When you get out of this mortgage crisis, you have to rebuild your retirement savings again, and that can genuinely defer your ability to retire by five or 10 years — or more.”

9. Consolidate Your Debt  

For homeowners with various sources of debt — such as outstanding credit card debt or car loans, or the aforementioned unsecured line of credit — all those payments can add up. Working with your bank to consolidate the debt by refinancing it into a single loan is an idea worth exploring. “Getting a debt consolidation loan can lower the monthly payment. It may even lower your interest rate, if you have credit-card debt, so I think that is a very smart solution whether you have problems with your mortgage or not.”

10. Sell Your Home  

Throwing in the towel and selling your home is the “last resort,” both Weintraub and Bruinsma agree. For starters, there could be penalties for breaking your mortgage. And, earlier, when you purchased the home, you would’ve already paid land transfer taxes, REALTOR® fees, legal fees, movers, and more. All of these expenses can erase any potential gains. Depending on when you purchased it, selling your home might even leave you further in the hole. The total transactional costs of buying and selling could equal 7 to 10% of the price of the home, Weintraub estimates. He emphasizes the importance of exhausting all other options before selling. “If you sell, then what are you going to do?” he asks, noting how competitive and expensive Canada’s rental markets are today. “Are you just solving one problem and getting another one the next day?”