Armchair economists from Toronto to Vancouver are debating the existence of a housing bubble, and I'm not taking sides. Maybe there is a bubble and maybe there isn't.
But if you've been thinking about your worst-case scenario, you're in good company. While the Crash vs. No Crash debate heats up, cautious home-owners across Canada are pulling out their calculators and playing a numbers game.
"If my home decreased in price by 30%, what kind of shape would I be in?"
I have a suspicion that when many home-owners mull the worst case scenario, it goes something like this:
"If my home's value drops far below what I owe on my mortgage, I'll walk away from it. Sure my credit will be ruined, but at least I will have my car and my savings, and I'll purchase again when prices drop."
Unfortunately this kind of thinking neglects to account for a little-known legal principle inherent to Canadian mortgages: "full-recourse" mortgage agreements.
"Full-recourse" is a Canadian creature largely absent in the U.S., and it is the bank's secret weapon to ensure they can pick your bones dry when you fall upon hard times. Full-recourse lending allows the lender to pursue borrowers who default on their mortgages. But they don't just want the house back. They come in search of the full value of the loan.
This means that when your bank goes "Power of Sale" and sells your house out from underneath you -- for substantially less than what you bought it for and less than what you owe -- you continue to be liable for the remaining balance of the mortgage.
Not only can you lose your house -- your mortgage lender has the power to strip you of (almost) everything else you own, and to garnish your future earnings until such time that the original mortgage debt is repaid in full.
This is how they can put the final nail in your financial coffin; this is how they will attempt take blood from a stone. Most importantly, this is new information to a great number of Canadian borrowers.
Your car, your tax free savings account, the money you have in savings and in the stock market; all of this can be seized. In certain provinces, like Ontario, your RRSPs may also be at risk.
So before you play the numbers game tonight, tapping away to calculate your worst case scenario, consider what non housing assets might end up caught in the mix if you default on your mortgage some day.
Only time will tell if Canada is experiencing an unprecedented overvaluation of the housing market. However, if the bubble-bloggers and Bank of Canada are correct, now is the time to develop strategies to shield your other assets from lenders employing full-recourse tactics.
Speak to a real-estate lawyer today to learn more.
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