Mortgage Basics

Full Recourse vs Non-Recourse Mortgage in Canada

Full Recourse vs Non-Recourse Mortgage in Canada

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    A mortgage is likely one of the largest financial obligations you will have in your lifetime. All mortgages require collateral in the form of a lien against your property until the mortgage is paid off in full. But did you know that depending on the province you live in, your mortgage could place your other assets at risk in the event of default? 

    Mortgages in Canada can either be full recourse or non-recourse loans, depending on the province in which you reside. These terms refer to the mortgage loan terms and can have significant implications for borrowers in the event of a default. 

    This post will examine the specifics of recourse and non-recourse loans and how they work in various provinces across Canada.

    Key Takeaways

    • Recourse loans allow lenders to legally pursue a borrower’s assets and income beyond the collateral used to secure the mortgage in the event of default.
    • Non-recourse loans restrict lenders to only the collateral used to secure the loan in the event of default.  
    • In Canada, most provinces have recourse mortgages, except for Alberta and Saskatchewan, which allow non-recourse mortgages on uninsured mortgages.

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    What are Recourse Loans?

    A recourse loan is a type of loan where the lender has the right to recover any outstanding balance from the borrower in the event of default. This can occur if the sale of the collateral used for the loan doesn’t entirely cover what’s owed. 

    This means if you default on your mortgage payments, the lender has the legal right to come after you to recover the difference should the sale of the home not fully cover the outstanding balance on your mortgage. You are fully responsible for this difference, and the lender can seek legal action to recover what is owed, putting your other assets at risk. 

    Example of a Recourse Loan

    To illustrate how recourse loans work with mortgages, if you purchased a home and have a mortgage with a remaining balance of $900,000, this is what you owe the bank regardless of what happens in the market. Let’s say home values drop in your area, and you can only sell your home for $700,000. 

    If you default on your mortgage, you can either sell your home or, eventually, the bank may choose to foreclose and sell it to recover what is owed on the mortgage. Since the home is now only worth $700,000 on the market, there is a $200,000 shortfall plus legal fees for the foreclosure or sale. 

    When the proceeds from the sale are not enough to cover the outstanding amount, your lender can pursue legal action. They can come after you and your other assets, including income, to recover this outstanding balance. However, some of your registered and pension accounts may be universally protected from creditors.

    What are Non-Recourse Loans?

    A non-recourse loan is a type of loan where the lender can only recover the collateral in the event of default. If the collateral doesn’t entirely cover the balance owed, the lender cannot seek legal action to recover the difference or pursue other assets to make up the shortfall. This type of mortgage is less risky for borrowers but more risky for lenders, making it much less common to have this type of mortgage in Canada. 

    This means if you were to default on your mortgage payments with a non-recourse loan, the lender can only recover what the collateral will cover when sold. They must then absorb the remainder as a loss. You are not responsible for making up the difference, and the lender cannot seek legal action to come after any of your other assets or income to recover the outstanding amount. It’s important to note that walking away from a non-recourse mortgage can significantly impact your credit score and future borrowing ability. 

    Example of a Non-Recourse Loan

    To illustrate how non-recourse loans work with mortgages, we will use the previous example of $900,000 remaining on the mortgage, and falling property values mean the home can only be sold for $700,000. 

    Since your mortgage is a non-recourse loan, if you default on your mortgage, the lender, in this case, cannot come after you to make up the $200,000 shortfall. The lender has no legal right to pursue you for the remaining balance and must absorb the $200,000 as a loss. They cannot come after you and your other assets or income to recover this outstanding balance. 

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    What it Means to be Underwater on Your Loan

    When you’re underwater on your loan, this means you have negative equity. This occurs when the outstanding balance is higher than the value of the collateral. This typically happens in markets where housing prices fall, or you borrow against your home equity, resulting in a mortgage balance that exceeds the home’s market value. 

    Provinces in Canada That Provide Non-Recourse Mortgages

    In Canada, most provinces have recourse loans, which means the lender can go after your other assets or income if you default on your mortgage to recover any losses. The only exceptions are Alberta and Saskatchewan, where non-recourse mortgages are available for uninsured mortgages. 

    If you have an insured mortgage, meaning you put less than 20% down as a downpayment and have mortgage default insurance, the Canada Mortgage and Housing Corporation (CMHC) backs the loan. You will automatically have a recourse loan if you have an insured mortgage in Alberta or Saskatchewan. CMHC can recoup any losses by taking legal action and coming after your other assets or income should you default on your mortgage. 

    Frequently Asked Questions

    Can I walk away from my mortgage in Canada?

    Walking away from a mortgage in Canada is generally impossible because most mortgages are recourse loans. However, in some cases in Alberta and Saskatchewan, it is possible to do so with a non-recourse mortgage. However, walking away from a mortgage will significantly damage your credit score and may make it much harder to secure loans or another mortgage in the future.

    How long does a Strategic Default have an impact on my credit?

    Strategic defaults, where you walk away from your mortgage due to being underwater, can stay on your credit report for up to 7 years. This will have a significant impact on lowering your score and making it more challenging to secure credit in the future. In Canada, bankruptcy doesn’t provide you with a clean slate when arranging a mortgage in the future, as some lenders may not be able to approve a mortgage with this on your credit history.

    Do you have to repay a recourse loan?

    Yes, you must repay recourse loans in full. If you default on this type of loan, the lender can foreclose on the collateral (your home). They can also legally pursue your other assets or income to recover any outstanding balance once the collateral is sold if there is an outstanding balance remaining.

    Final Thoughts

    While it may be tempting to simply walk away from your mortgage if you’re going through financial difficulties, the reality of how mortgages work in Canada makes this option far more complicated. Knowing whether you have a recourse or non-recourse mortgage is essential for your financial well-being since recourse loans can have serious implications for your other assets and credit.

    If you’re struggling with your mortgage payments or high interest rates, consider seeking professional advice from a mortgage expert before making any decisions that could impact your finances.

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