Risky Reprieves: The Inadvisability of 2nd Mortgages to Avoid Bankruptcy

Published July 5, 2017 by Real Estate Leads

It’s weHome floating on a life preserver.ll understood that one of the inevitable developments that come along with an extensively inflated housing marketing is having homeowners who are in over their head and very precariously perched when it comes to the mortgage they have on their home and the debt that’s assumed as part of it.

Those kinds of market conditions definitely exist in certain metro regions in Canada, and being ‘house poor’ puts you at risk of defaulting on your mortgage. That’s obviously going to be concern number one for homeowners who have gone in a little more head long than they thought, but it’s not the only decidedly unpleasant potential reality. It can also lead to bankruptcy, and certain people in certain areas and certain lines of work are more susceptible to it than others.

Here at Real Estate Leads, our online real estate lead generation system is proven valuable as a way for realtors to get more property listings, but we’ve also got our thumb somewhat on the pulse of trends and hot topics in the world of real estate and home ownership in Canada. So many of them are related to financing, and this one is really worth a long look.

First off, we’ll share what many of you may already know – there are not nearly as many bankruptcies declared in Canada as there are in nearly every other country in the world. However, does a lack of here mean the average Canadian consumer is doing better than their international counterparts? Much like the lack of mortgage defaults, there’s some foreboding facts to be unearthed if you’re willing to dig.

All it takes is a look at the Homeowners Bankruptcy Index, which is currently at an all-time low. That should be interpreted to be a positive, but it would seem there are fewer bankruptcies due to homeowners refinancing their debt by bundling it into 2nd (or even successive of that) mortgages.

Accordingly, that all-time low number is something of an artificial reality, and one that masks a very large potential problem for anyone who thinks a re-mortgaging of property is their way out of a financial failure.

More About The Index

Few if any of us are debt experts, so it’s entirely natural if you’ll need a little walkthrough of the explanation of the Homeowner Debt Bankruptcy Index. In their words, it measures the percentage of insolvent debtors who owned a home at the time they filed a bankruptcy or consumer proposal. Let’s now give you a quick walkthrough of the terms so that we’re on the same page.

To put it more simply, insolvent debtors are individuals that are unable to make scheduled payments to pay down their debt. When a consumer proposal is offered, it’s an attempt to negotiate them paying a percentage of their debt. Bankruptcy is when you state officially that you’re entirely out of means of paying that debt, and you – for all intents and purposes – ‘surrender’ to your debtors and seek an asylum from the bank if you will.

From there, a licensed insolvency trustee (LIT) liquidates your assets and distributes them to your creditors. Of course, that very rarely clears the entirety of the debt, but that’s where they start.

All-Time Lows

Interestingly, the Homeowner Bankruptcy Index is currently at an all-time low despite the very precarious situations so many homeowners are reported to be in. The number of people filing for a consumer proposal or bankruptcy that owned a home fell to just 7% at the end of May 2017. That’s a fairly significant drop from the 35% it was at in February 2011. If you look at the chart, you’ll notice that it’s dropped almost precipitously in 2016 and 2017. Further interesting is the fact that this was right when home prices across Canada began increasing exponentially.

Decline Is Due To Rise In Home Prices

The answer to why those two specifics add up when they really shouldn’t? It is because Canadians are using their homes much like a bank machine, withdrawing from the solidity of their equity. Homeowners with significant unsecured debt are now seeing being able to refinance this debt through a second mortgage or home equity line of credit as a viable option, albeit a risky one.

There’s 1.91 million Canadians with HELOCs (home equity lines of credit), and even more individuals and couples with a second mortgage. That’s not what you’d consider to be traditionally representative of booming incomes that would be the ideal reason to see delinquencies decline.

Monitoring agencies are warning that any softening of the market that results in a correction (see ‘bubble bursting’) of home values will almost certainly come with a sudden spike in homeowners who have no choice but to file for insolvency. The warning goes further to say that if this combines with a bumping up of interest rates, then the result could be the Homeowner Bankruptcy Index rising above levels that were experienced after the 2008 / 2009 recession.

Canadians have had no qualms about piling on record amounts of debt over the last 2 decades, and it would seem they’re now looking for every possible way to delay paying it back. Refinancing your mortgage to accommodate debt might work for now, but there’s no debating it leaves homeowners that take this option in a more vulnerable spot. A MUCH more vulnerable and risky spot. Bankruptcy or crushing debt aside, keep in mind as well that the less equity in your home, the less likely you are to secure good mortgage rate renewal terms. Worse terms mean higher rates, and you can be certain that it will definitely complicate your ability to pay your bills on time.

Part of being a reputable realtor is being frank with your customers about their purchasing power. You want to attract and retain clients, and in the interest of the first part of that we suggest you sign up for Real Estate Leads and begin receiving online-generated qualified buyer and seller leads delivered to you exclusively for your own area of the country.