In case there was ever any doubt, the last nine months have reminded us that life can be full of unexpected events. The COVID-19 pandemic has presented us with never-before-seen challenges. For some, this has meant struggling to meet financial obligations such as monthly mortgage payments.

Whether in the middle of a global pandemic or during ‘normal’ times, mortgage holders have a contractual obligation to make their mortgage payments in full and on time. If you fail to make these payments in full, on time, or at all, you have defaulted on your mortgage and it can have devastating consequences.

No matter how many other debts you have, always concentrate on repaying your mortgage first – the consequences of failing to do so are significant.

Consequences
Failure to make your regular mortgage payments can have severe long-term impacts. Whenever you make a payment late or miss a payment entirely, additional fees and interest accumulates. The situation will worsen with the frequency of payments missed and the length of time they’re pushed back. A mortgage lender can either demand immediate payment of these additional fees and interest or add them to the mortgage principal. In the latter case, you could end up paying a lot more over the life of your mortgage.

Your credit rating will take a plunge and your ability to obtain a mortgage or qualify for new loans or lines of credit, now and into the future, will be compromised. An inability to demonstrate creditworthiness and overall financial health exposes you as a high-risk borrower and raises red flags with lenders.

Most lenders will offer a one-month grace period but ongoing delinquency, typically 60 days or more, will trigger legal proceedings to enforce the mortgage. By this point, significant fees and penalties may be added, which make it more difficult to take corrective action. The legal proceedings taken by a mortgage lender against a borrower in default include:

• Power of sale
  • a legal process where the lender sells your property at fair market value
  • after the mortgage principal, arrears, interest and fees are paid, you may receive any excess proceeds or be liable for any shortfall
    
    
• Foreclosure
  • a legal process where the lender takes title of the property in satisfaction of the mortgage
  • you will not benefit from any profit or be liable for any shortfall from any future sale of the property

What to do in case of default
Whether you’re expecting a default or have already defaulted, reach out to your lender immediately. In rare cases, mortgages have “skip a payment” provisions that you may not know about. Be proactive in managing the situation and keep the lender informed about your situation. Your lender may offer you one of the following possible options, although they may not have a legal obligation to do so:

• Repayment
  • you repay the arrears, plus any late fees, interest or penalties
  • this is the best solution if your financial difficulties are temporary

• Installments
  • you negotiate a fixed amount of time to repay the arrears
  • past due amounts may be added to your upcoming regular monthly payments
  • look at ways to increase income flow, withdraw from savings or reduce current spending habits to accommodate the larger payment
  • this is an appropriate option if you’ve already missed, or are late on, a small number of payments

• Restructure
  • your lender allows you to restructure your existing mortgage to make the monthly payments less costly and more manageable
  • you essentially change one or more of the terms of your original mortgage contract such as extending the loan amortization/adding missed payments to the outstanding balance
    
    
• Forbearance
  • your lender provides a set period of time during which payment is not required
  • after this period, you’re required to not only continue your regular mortgage payments but also repay the past due balance per an agreed-upon repayment plan
  • use the forgiveness or grace period to save as much money as you can and create a budget for paying back the full amount once the repayment period begins
    
    
• Selling
  • if your situation is dire, selling the property could be your only option
  • you may also wish to negotiate with the lender for a forbearance to allow time for the property to sell

Be prepared
Without a crystal ball, we can never predict what life-altering circumstances may come our way. This why it’s essential to build a rainy-day fund – saving a little extra in a dedicated account each month so you can avoid defaulting on your mortgage.