If you think about a person who is defaulting his mortgage payment – then probably job loss will come to your mind – as a cause.
Sure enough when a lender tries to sell you the mortgage protection insurance then they tell you that it protects you against sudden loss of income.
Somehow things are not the way as they are said to be. There is this sales pitch and then there is reality.
A recent Fitch press release on – Canadian Residential Mortgage Loss Model – gives us some veiled insight into the real reasons.
The process is secret and there is no way to find out the real algo or the formula. There are some scattered indications all over the press release and we can put them together.We can look at it from two ways – it tells us the strongest drivers. They can be your reasons for to do or not to do.
Borrower equity is the strongest driver of default – So, more money you have in the house less is the chance of your default. That makes sense. If you have money in the house and if it is significant then you will rather sell the house than default the mortgage payment and risk a power-of-sale.
There is a problem in Fitch model. It takes some sustainable home price model into account. That is obviously is a murky area.
Drop in Home Price has significant effect on default rate.
Borrower credit score came second: Regardless of your job situation – if you have a high credit score then you will pay the loan if you are alive. Well, we all know that – didn’t we?
If you have your credit score a bit short then you are already out of luck from getting the best mortgage rate.
Debt service ratio:
Debt service ratio comes in third: Officially you can’t cross 44% of your wage as your total debt payment. That is before tax though. So, after paying 44% towards your debt payment then 30% in income tax and 13% in HST you will be in a much stressed state.
But there are March Breaks and kids and there goes the credit line.
The next three reasons are;
Purpose of the loan – First Time or re-financing etc?
Occupancy – Owner occupied or rental?
Property Type – CONDO?
Now you see – loss of income is not a factor in mortgage default. Indirectly – poor employment condition may influence home buying but it will not influence mortgage not defaults.
If you have good credit score and good equity in the house then don’t worry – you – all by yourself – will never let CMHC come to you asking for money.