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Falling behind? Call your lender

One of the biggest reasons people get into financial trouble is by refusing to admit when there's a problem. Even when signs are readily apparent -- missed credit card payments or difficulty meeting end-of-month bills -- most Canadians prefer a stoic, "I can handle it," approach.

But if you're having trouble coming up with the cash to make your mortgage payments, it's time to get your head out of the sand.

"You should call your lender right away," says Josée Gosselin, a mortgage expert with Mouvement Desjardins in Montreal. "It takes a long time to build up a credit history, but it can vanish in an instant."

Gosselin should know. She has 16 years of experience in the credit approval business, and during that time she's learned to spot trouble early. And like most Mouvement Desjardins credit experts, she's been doing a pretty good job.

Desjardins runs one of the most efficient mortgage operations in the country. Only 0.25 percent of the company's $41 billion in outstanding mortgage holdings are in arrears compared to 0.33 percent of the $539.9 billion that were owed to Canadian financial institutions as a group at the end of 2002.

So if you're looking for advice, you can't do much better than Gosselin. And her advice is to act fast.

"No financial institution likes to be surprised by a missed payment or a bounced cheque," she says. "But if you call your adviser in advance, something can usually be worked out."

Temporary problems
According to Gosselin, the most important distinction is whether your financial problems are of a temporary nature, such as when a series of bills have piled up, or are more permanent, stemming from a job loss by someone who lives in a one-company town.

Like most of the financial services lenders we talked to, Gosselin is reluctant to give detailed advice. "It's hard because every case is different," she says. "That's one of the reasons that good communication [with your lender] is so important."

According Gosselin, most typical short-term problems -- such as an accumulation of credit card debt -- can be handled through a consolidation loan. Debt consolidation usually stretches out payments over a longer period of time and typically has the added benefit of being carried at lower interest rates.

Another option available to many borrowers is the "skip payment" option, which is built into many mortgages, according to Jim Rawson, sales manager at mortgage broker Invis. Desjardins does not offer a skip-payment option, but in practice, they will allow it in special circumstances.

A much more common alternative at Desjardins is to allow the customer to simply make interest payments on the outstanding debt, skipping the principal. This small relief can be a big help, particularly when a mortgage is in its later stages and the principal comprises a significant portion of the payment.

In any case, if you have to skip a mortgage payment, you should take it as a signal that all is not well with your financial planning strategy. One good option, says Jannick Desforges, who handles legal affairs at Options Consommateurs, a Quebec-based consumer rights association, is to visit a nonprofit credit counselling agency.

"Most provinces have them, and they will generally provide budgeting advice free of charge," says Desforges.

Longer-term challenges
If you face longer-term financial imbalance, from unforeseen expenses or a significant drop in pay, there are number of options available, says Rawson.

Banks will generally show significant flexibility in increasing your amortization period, especially when a consumer has a built up a certain amount of equity in his house. An amortization extension is a fairly routine occurrence, although you will be charged a nominal fee.

If you are really hard up, you can also opt to refinance your home. Refinancing enables you to take out new money on your mortgage by borrowing against increases in your house's value and your equity in it, which may have built up over the years.

However to get refinanced, you'll have to have your house re-appraised and revisit the notary, so there will be additional fees involved.

Act early
The bottom line, says Gosselin, is that both consumers and financial institutions have everything to gain by acting early when financial difficulties are in the air.

"There is nothing worse than having to foreclose on a mortgage," says Gosselin. "Very often, there isn't only one person living in the house, which means a lot of people are affected."

Banks also often lose money on a foreclosure because of high carrying costs, legal fees and the fact that repossessions are, by definition, sold as quickly as possible, which does not always coincide with a hot resale market.

"It's much better to plan ahead," says Gosselin. "That way everybody wins."

Peter Diekmeyer is the Montreal Gazette's management columnist.

-- Posted: Sept. 30, 2004
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