Walking away from your mortgage isn’t just an American phenomenon. It can happen in Canada, too, in a couple provinces: Alberta and Saskatchewan. Referred to as “jingle mail,” don’t let the cute nickname fool you. Walking away from your mortgage is a serious decision not to be taken lightly.
A common reason for walking away from your home is an underwater mortgage. An underwater mortgage is when the amount of your loan exceeds the fair market value of your home. For example, if you purchase a $400,000 home with the bare minimum five percent down payment ($20,000), you’d end up with a mortgage of $380,000. If the real estate market goes through a rough patch and the price your home would sell on the open market falls below $380,000, your mortgage would be considered underwater.
An underwater mortgage is especially problematic if you’d like to sell your home. Here’s why: if you sell your home for less than the outstanding balance on your mortgage, you’ll be responsible for paying the remaining balance out of pocket. In the above example, if you sell your home at a loss for $360,000, you’d have to pay $20,000 out of pocket, to make up the full amount of the loan.
Underwater mortgages were common in the U.S. after the subprime mortgage fiasco in 2008, which saw real estate values tumble. In the U.S., at least 10 states have non-recourse mortgages. A non-recourse mortgage is similar to an escape clause from your mortgage. Americans took advantage of this in droves when the market took a nosedive.
Walking Away from Your Mortgage in Canada
Walking away from your mortgage is a little more complicated in Canada than the U.S. Two of the Prairie provinces, Alberta and Saskatchewan, have similar non-recourse rules. With the price of oil taking a tumble, there’s been a strong uptick in listings in Alberta, as homeowners try to see how much they can sell their homes for on the open market.
Before you throw in the towel and default on your mortgage, it’s important to know the rules of the game. Walking away from your home only makes sense if the values fall at least 20 percent. That’s because you only fall under the non-recourse rules if you have a conventional mortgage. Those who made a down payment between five percent and under 20 percent with mortgage insurance are out of luck. The rules are even more restrictive in Saskatchewan, where homeowners who’ve renewed their mortgages, as well as those with government-backed mortgage, can’t walk away from their mortgage.
The bottom line is that walking away from your mortgage should be a last resort. Doing so will negatively impact your credit score and rating. This makes it difficult to obtain another mortgage. Only those filing for bankruptcy should consider throwing in the towel on their mortgage.
If you are interested in Alberta, get the best mortgage rate upfront to be able to manage your finances better.