I can't afford my mortgage, what can I do?

With high inflation triggering a rise in interest rates, many homeowners feel the pinch. Those with variable-rate mortgages may be in line for further rate increases, which could make monthly payments more expensive and/or raise the lifetime costs of a loan. And those with fixed-rate mortgages may be hurting too, with higher gas bills, for example, making it harder to make ends meet.

The good news is that you have options to make mortgage payments more manageable. If you’re house poor, you don’t necessarily have to sell your home, though for some people that may be the ideal option.

Depending on your current mortgage terms, you may be able to work with a lender to obtain a lower interest rate, thereby reducing your monthly payments. Or you could add flexibility to your personal finances by taking out a loan that gives you the option to pay back your mortgage later down the road, such as a Fraction Mortgage.

Of course, making changes like these carries risk, and scammers are all too eager to pretend to help distressed homeowners. So, it’s important to do your homework and see what works best for your situation.

With that in mind, some of the top ways to reduce mortgage payments or add flexibility include the following:

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1. Ask for help

No one wants to have more debt than they can manage, but if you’re struggling, you don’t want to let pride get in the way. Ask for help, but make sure you’re turning to reputable sources, such as government agencies and your mortgage provider.

If you can’t make your monthly mortgage payments, the Canada Housing and Mortgage Corporation (CMHC) recommends getting in touch with your mortgage lender. Depending on your lender, they may be able to offer a number of ways to lower your payment. These options include:

• Temporarily defer mortgage payments
  Your mortgage lender could allow you to to defer mortgage payments for a certain amount of time.
  

• Prolong your amortization period (repayment period):
  A longer amortization period could lower your monthly payments. However, it would mean that your mortgage will take longer to pay off
  

• Roll missed payments into your mortgage balance:
  If you’ve already missed some payments, your mortgage provider may agree to add outstanding payments back into your balance. Please note, it’s highly recommended that you not miss any payments as this may result in mortgage default, which could limit your refinancing options and damage your credit.
  

• Switch to a fixed interest rate mortgage:
  Switching from a variable rate to a fixed rate would protect you from future rate hikes. However, it may cost you an additional fee if your mortgage is not up for renewal.
  

• Make special arrangements for repayment:
  Your mortgage lender may be able to develop a custom solution to your predicament, employing a combination of the above methods and other personalized terms.

“Your mortgage professional is there for the long haul. They want to establish and maintain a positive relationship with you. Your lender is trained, equipped and ready to help you deal with the temporary financial setbacks that you may be facing.” explains the CMHC.

With support from your mortgage lender, you may be able to access a number of relief programs that can help you afford your mortgage payments.

But watch out for scams. Fraudsters are likely to target desperate homeowners who are at risk of mortgage default.

“You may be tricked into transferring your property title to somebody to get a loan that will help you make your payments. Fraudsters usually keep the payments you make and also possess the title to your home, which they can resell or remortgage.” explains the Financial Consumer Agency of Canada.‍

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2. Refinance your mortgage

While you might not be at the point of staring down foreclosure, higher monthly mortgage payments can still be stressful. Refinancing your mortgage can ease that burden, such as by reducing your monthly costs or changing your loan term to a duration you’re more comfortable with.

If you already have a variable rate mortgage, you might benefit from refinancing to fixed rate mortgage. This may not reduce your monthly payment, but it will protect you from future rate hikes.

You also might want to consider refinancing to a new loan duration. If you lengthen your loan term, your monthly payments could be lower, though you could end up paying more overall when adding up the lifetime costs of the loan. Conversely, you might want to refinance into a shorter loan term. Even if that raises your monthly mortgage payments, you might want the flexibility of paying off your loan sooner, such as if you want to be debt-free in retirement.

When refinancing, keep in mind the costs associated with taking out the new loan, rather than just looking at the headline rates.‍

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3. Rent out your home flexibly

You don’t have to change your mortgage terms if you can find ways to afford your current payments more easily. One way to do this is renting out your home, though you should make sure you’re following local rules and regulations. 

But that doesn’t mean you have to move while renters occupy your home. A few flexible ways to access rental cash include:

• Rent your home while out of town: Suppose you often visit family out of town. During those trips, you could be making money by renting out your home through sites like Airbnb or Vrbo.
• Rent a room in your home: If you’re house poor, and want to free up money, you don’t necessarily have to downsize. You could rent out an extra room in your home if you’re comfortable with that.
• Rent storage space: If you have extra space but don’t necessarily want someone to stay in your home, you could rent storage space in your home through a site like Spaceishare.
• Rent your amenities: If your home has amenities such as a swimming pool, you could also rent those out from time to time through a site like Swimply.

These types of rentals can increase your income and make it easier to afford increasing mortgage costs. Still, you want to factor in the risks that could come with renting along with any lifestyle changes you might have to make.

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4. Tap into your home equity

If you don’t want to rent out your home, you can still free up cash by tapping into your home equity. Options such as a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance can enable you to take advantage of a real estate boom, without needing to move.

Depending on how you access your home equity, you might be required to pay off your first mortgage; or you might choose to do so willingly, such as if the new debt has a lower interest rate or more favourable repayment terms than your first mortgage. Afterward, you still might have extra cash available. That can help, such as when you want more money for retirement or simply want more financial flexibility.

That said, tapping into your home equity still carries risks. Even if you give yourself temporary relief from higher mortgage payments, you want to make sure you’re able to pay back the new loan, especially if you’re taking on more debt overall. Otherwise, you could lose your home.

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5. Take out a Fraction Mortgage

Another way to tap into your home equity and gain flexibility is to take out a Fraction Mortgage to replace your existing mortgage. Unlike many traditional loans, you don’t make monthly payments on a Fraction Mortgage.

You can wait until the end of the five-year loan period and then renew, or maybe you’ll be in a better position at that point and can pay back the loan in full. Or, you might decide to sell your home. The point is, you have flexibility and don’t have to stick to a monthly schedule if that doesn’t work for your personal finances.

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Need a break from monthly mortgage payments?

With enough home equity, you may be eligible to switch to a Fraction Mortgage — a financing option with no monthly payments. Get your free estimate today. 

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Disclaimer: Information in this article is general in nature and not meant to be taken as financial advice, legal advice or any other sort of professional guidance. While information in this article is intended to be accurate at the time of publishing, the complexity and evolving nature of these subjects can mean that information is incorrect or out of date, or it may not apply to your jurisdiction. Please consult with a qualified professional to discuss your specific situation and confirm any information.