Why your Lines of Credit should come first
Studies have shown that when times get tough, Canadians favor paying their mortgage over all other debt. What most Canadians do not know is that a secured credit line should be paid ahead of a mortgage. A secured debt simply means the debt is backed by the value of an asset, often a home. A credit line is different than a mortgage in that a credit line is “due on demand”. That means if you default on payments, the bank has the legal right to call the entire loan due. In the case of a closed term mortgage, the bank will ask for the entire amount, but so long as there is term left on the mortgage, and can pay the arrears back in sufficient time, the bank must drop the claim against you. This is a very important point in solving a foreclosure!
We have reviewed this exact problem hundreds of times with our clients over the years. What typically happens is a person will make a choice to skip their line of credit payment, thinking they can catch up later, since they are used to a credit line balance routinely fluctuating up and down. What happens instead is that they end up receiving notice from the bank’s lawyer stating that their home is now in foreclosure. Because it is a demand loan they now owe the entire balance of their loan, not just a few thousand dollars in arrears payment.
Why can’t I just repay the missed payment to stop the foreclosure?
As mentioned above, this depends on whether the debt is a term mortgage or a line of credit. A term mortgage in foreclosure is much easier to remedy than a line of credit that has been called due and owing by the bank. Once the default occurs, it sets off a course of events that are not easily stopped without consequence (and a lot of legal fees). To determine the best course of action, it is best to discuss this matter with a professional who can help you understand the foreclosure process and what can be done to slow the process and prevent any further damage. There may be options available to stop the foreclosure with minimal repercussions but knowledge of the foreclosure process and timing is important.
