This is an update from a previous version.
Imagine losing your job unexpectedly and not being able to pay your mortgage. Would you be able to handle this kind of financial setback?
A Manulife study found that 43% of Canadian homeowners have already experienced higher mortgage rates since the Bank of Canada started raising interest rates in 2022. This is expected to increase to 60% by the end of 2024, putting even more pressure on household budgets.
Housing costs—whether they're for a mortgage or rent—are often the largest monthly expense for families. According to the Canada Mortgage and Housing Corporation (CMHC), your housing costs should ideally stay below 32% of your gross monthly income. Sticking to this guideline allows for essential financial breathing room. Without it, you could find yourself in a tough spot—owning a beautiful home but struggling to cover day-to-day expenses.
To help you avoid such financial strain, here are four tips to stay prepared:
How to protect your ability to pay and set yourself up for success
Preparing for a financial crisis, such as job loss, involves planning ahead. Many homeowners, particularly in expensive real estate markets like Toronto and Vancouver, often make the mistake of buying a home at their maximum purchase price.
“It's important not to overextend yourself to begin with,” says Sean Schumacher, senior vice president at ONPrem Colo. “Just because you qualify for a certain mortgage amount, doesn't mean you can afford it.”
He explains that mortgage qualification ratios don't consider many everyday expenses or allow for savings.
“It's important to take on a mortgage that you know you can personally budget for,” says Schumacher.
Related: Mortgage payments: How much can you really afford each month?
Make an emergency payment plan
With home ownership comes great responsibility. When you own a property, it’s important to have an emergency or rainy-day fund to deal with unforeseen financial circumstances.
“Connect with a financial planner to help assess your short- and long-term financial goals,” advises Schumacher. “Within that process it's important to create a savings plan that will provide you with a cash buffer you can easily access during an unforeseen financial crisis.”
If you lose your job, it helps to have an in-law basement apartment or duplex to bring in some much-needed income until you land a new job.
“Purchase or convert your existing home into an owner-occupied rental,” says Schumacher. “You may be able to pay for half of your mortgage with the rent collected from a basement apartment.”
Should you take a mortgage payment vacation?
Some banks offer a mortgage vacation of up to four months if you've previously made enough prepayments equal to four months of mortgage payments.
“During financial hardship, this is a good way to significantly reduce your monthly expenses by skipping your mortgage payment entirely,” says Schumacher.
But he warns that it's not really a 'vacation.' The skipped payments are added to your loan balance, and you'll pay interest on them for the rest of your mortgage.
Why getting mortgage protection insurance can benefit you
Another way to protect yourself is by getting mortgage protection insurance. Like mortgage vacations, it has its pros and cons, but it is a “relatively easy and inexpensive way to protect your mortgage through life and disability insurance,” says Schumacher.
“If you die, the mortgage is paid out in full and if you become disabled your mortgage payments are covered,” he adds.
The application process for getting mortgage protection insurance is a simple one that involves filling out a one-page questionnaire and providing your credit card information.
Schumacher also points out that the policy is tied to your mortgage. If you cancel your mortgage or need to get a new mortgage, your policy is canceled, and you would need to reapply.
However, unlike a personal life insurance policy, the bank is the main beneficiary - which isn't always the best solution.
“When there is loss of life, the policy automatically pays off the mortgage. The next of kin doesn't get to choose what to do with the money (maybe keeping the mortgage or only paying off a portion makes the most sense financially),” says Schumacher.
“Term life insurance may provide more comprehensive coverage, for a slightly lower price,” he adds.
Taking steps to safeguard your financial future can make all the difference during challenging times. By not spending more than you can afford, making an emergency savings plan, thinking about a mortgage payment break, and looking into mortgage protection insurance, you can better protect your home and finances.
Read next: The final mortgage payment: What you need to know
