What happens to my mortgage if my lender goes bankrupt?
The ongoing banking crisis in the United States has had many in Canada recently worrying about what would happen if something similar were to happen to a Canadian bank. Some worry that the issues present in American banks have already started showing up in some of our banks, with headlines warning of major Canadian banks being the next to fall.
Regardless of whether or not there’s any real risk of a banking crisis in Canada, let’s take a look at what happens to your mortgage if your lender was to go bankrupt.
Will Canada experience a banking crisis?
First of all, you don’t need to go rushing to take all your cash out of the bank based on a sensational headline, a deeper look into the financials shows none of Canada’s big 5 are anywhere near insolvency. More importantly, It’s commonly said that the big 5 Canadian banks are “too big to fail” and this is largely true. What this means is that the consequences of any one of the major Canadian banks going bankrupt and being unable to make their customers whole is simply not an option for the Canadian government, which would undoubtedly step in and ensure that the bank’s creditors did not face any losses, no matter the cost.
You’ll be reassured to know that aside from the near certainty that the Canadian government would step in to prevent the collapse of Canadian banks, deposits and investments with Canadian banking institutions are insured. Your cash deposits are insured up to $100,000 by the CDIC (Canadian Deposit Insurance Corporation) at each institution, and your investments are insured by the CIPF (Canadian Investor Protection Fund) which aims to ensure investors are entitled to the market value of their holdings.
To sum up: In the unlikely event a major Canadian bank goes under, it will probably be bailed out by the government or purchased by another firm. If this doesn’t happen, your cash holdings are insured up to $100,000 and your investments are insured by the CIPF.
What happens if my lender goes bankrupt?
The short answer is: Nothing!
The longer answer is that your mortgage will likely be purchased by another financial institution as part of the liquidation of the lender’s assets. Unfortunately, you won’t be off the hook for your mortgage if your lender goes bankrupt, though it can be nice to dream.
In the unlikely event that your lender declares bankruptcy, it will need to sell its existing assets in an effort to pay off its debts. Your mortgage is one of those assets. When you borrow money from a lender, that firm then lists your debt as an asset on its balance sheet, as they assume you will pay that loan back over time with interest. If the firm needs to liquidate its assets to pay off its obligations, the ownership of your debt can be sold to another firm, at which point you will continue to pay your mortgage, just to a different owner. If you’re wondering, yes this is true of all other forms of debt like student loans and credit card debt.
What happens if my mortgage is purchased by a different company?
First of all, as we already mentioned, this is very unlikely to happen, and you should consult with your mortgage advisor if you find yourself in this situation and have questions. All that would happen is you would receive a notice from the new owner of your mortgage who has a legal obligation to contact you and inform you of any changes to your mortgage. The new firm is obligated to keep the terms of your current mortgage until your renewal date, at which point we suggest you shop around with different lenders to determine where you can get the best mortgage terms for you going forward.
Recommended reading: Mortgage switch vs mortgage renewal
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