The condo that no longer pays for itself: underwater, bleeding cash, and the four ways out
My rental doesn’t cover the mortgage. How long can I keep doing this?
If rent no longer covers the carrying costs, every month of waiting has a price you can calculate. There are four routes to compare. Each has a financial cost, and any expected mortgage shortfall must be reviewed in the household’s full legal and insolvency picture.
Who these remedies are for. Everything on this page about a consumer proposal or a bankruptcy applies to a person who is genuinely insolvent under the Bankruptcy and Insolvency Act: someone who cannot pay their debts as they come due, or who owns less than they owe. That is not a formality. It is the first thing I assess, and the law requires me to. If you are not insolvent, these are not your remedies, and arranging your affairs to look insolvent when you are not is the worst thing you can do: the Act lets a trustee reverse payments and transfers made before a filing, the Official Receiver examines a bankrupt under oath about the causes of the bankruptcy and what happened to the property, and a discharge can be opposed on exactly those facts. I am bound by my Code not to assist anyone down that road, and I will not.
I am Paul Franchi, a Licensed Insolvency Trustee in Ontario, and a lawyer by training. This page is for the owner saying: the rent does not come close, we are underwater, and we do not know whether to sell or keep paying. Put the sale shortfall and the monthly cash gap on paper. They are different problems, and a plan needs to account for both.
The practical problem is a unit whose rent no longer covers its carrying costs and whose sale proceeds would not repay its mortgages. Whatever the wider market is doing, those two figures are the starting point for the owner’s decision.
This page is about the decision, not the market. It puts a number on waiting, walks the four ways out, and tells you where a consumer proposal fits and where it cannot.
Six facts that decide the route
| Check this first | Why it changes the route | Gather |
|---|---|---|
| What could the unit sell for today, after selling costs? | It shows the real shortfall instead of the listing price. | Two current valuations or listing opinions; mortgage payout statements |
| What do you pay each month after rent? | It puts a price on waiting. | Rent, mortgage, condo fees, tax, insurance and repairs |
| Is any loan registered against both properties? | One lender may control whether either property can be released. | Current title search and every mortgage or charge |
| Is the unit tenanted? | A sale or enforcement does not erase tenant rights. | Lease, rent ledger, notices and LTB correspondence |
| Is the shortfall fixed, or could it arise after a filing? | Timing may affect which route is available. | Lender letters, sale or enforcement status and trustee review |
| Are you insolvent under the Act? | A proposal or bankruptcy requires the legal test to be met. | Complete debt, asset, income and expense picture |
Still not sure where you stand? Send me your question. I read them myself and I answer them personally. If you want to talk through next steps, I can help directly in Ontario, and the other Licensed Insolvency Trustees I work with cover the rest of Canada. Paul Franchi, Licensed Insolvency Trustee.
What waiting actually costs
Waiting is not free and it is not neutral. It has a monthly price, and it buys you a bet on prices that you can price.
Here is an illustrative unit. It would sell today for about $620,000. The mortgages against it total $700,000. It rents for $2,500 a month. The mortgage, the condo fees, the taxes and the insurance come to $3,400. In this illustration the owner covers the difference from their own pocket or a line of credit. All costs in the table are hypothetical inputs, not quotes: commission is five per cent, tax on commission and the legal fee is thirteen per cent, and the closing-cost block is $2,970. Replace them with estimates for the actual property.
| What waiting costs | Illustrated amount |
|---|---|
| The monthly shortfall between rent and carrying costs | $900 a month, about $10,800 a year |
| Illustrated sale price of $620,000, less commission $31,000, tax on commission $4,030, legal fee $2,000, tax on legal fee $260, two discharges at $300 each, and status certificate $110 | $582,000 |
| The mortgages that must be paid out | $700,000 |
| The shortfall on a sale today | about $118,000 |
| If prices never move: years until a sale clears the mortgages | never; the bleed continues at $10,800 a year for as long as you hold |
| If prices rise 3 per cent a year: years until a sale clears the mortgages | about 7 years, and about $76,000 paid out of pocket to get there |
| If prices rise 5 per cent a year: years until a sale clears the mortgages | about 4 years, and about $43,000 paid out of pocket to get there |
| If one lender’s mortgage is registered on both this unit and the home you live in | the standalone-unit table does not settle release of title: that lender can block the sale of either property until he is paid in full unless the mortgage itself says otherwise. Get the payout and release terms assessed with the lender and your lawyer before comparing a sale with more time holding the property (see the top rung of the house-poor ladder and the proposal section below). |
The growth rows hold the mortgage balance at $700,000 and the monthly cash gap at $900, and apply today’s selling-cost share to the future price. They ignore principal reduction, changing costs, rent changes and borrowing interest on the cash gap. They are illustrative arithmetic, not forecasts. At three per cent annual growth, year seven is the first whole year in which the modelled net sale proceeds cover the mortgages; at five per cent, it is year four. The cash paid while waiting is $75,600 or $43,200 respectively. Covering the mortgages does not recover that money: the rows show when a sale clears the mortgage balance, not when the household breaks even on the investment. If one lender holds both properties, read the final row and the mortgage terms before using the standalone-unit model.
Run the table with your own numbers and compare the amount a sale would leave you owing today with the cash you can afford to commit while waiting. An expected price increase is one assumption to test; it does not pay the monthly gap. If you would like the rows worked for your unit, that is a useful starting point for a conversation.
Can I sell an underwater condo, and what happens to the shortfall?
You can sell, the lender has to agree to it, and the shortfall does not disappear. In Ontario the lender can pursue you personally for the shortfall.
A sale that will not clear the mortgages cannot close unless each lender agrees to discharge its mortgage for less than it is owed. Ask each lender for its written position before accepting an offer that depends on a discharge for less than the mortgage balance. But the difference between what the sale pays them and what you owe them is not forgiven by the discharge. It becomes a debt you owe personally, on the mortgage covenant, and the lender can pursue it.
That shortfall, on the unit above, is about $118,000. It is a real number and it is the reason people freeze. The rest of this page is about the fact that it is also, once the property is gone, an ordinary unsecured debt, and ordinary unsecured debt is what the insolvency system deals with, for a person who is insolvent.
The mechanics of selling, the order of operations with your trustee, and the mistakes made in the months before a filing that cannot be undone, are on Selling your house when you have too much debt: before, during, or after a proposal. This page stays with the second property.
The tenant
Your tenant’s rights do not depend on your finances, and the notices are not yours to improvise.
If the unit is rented, the tenant is the first practical fact in any sale or surrender. Selling the unit, or losing it, does not evict your tenant. Nobody takes possession of a tenanted unit without the tenant leaving or a Landlord and Tenant Board order, and the Board is where the rules on that live; whether and how a tenancy can be ended for a sale, and what notice and compensation apply, is a paralegal’s or lawyer’s work, and this page states none of it. What you should know now is only this: do not serve a notice you found online, and do not stop maintaining the unit because you are behind on it. Both make a bad position worse, and the second one is what buyers and lenders see first.
What “walking away” really means in Ontario
It means the lender sells the unit for whatever it gets, adds its costs, and pursues you for the rest. Walking away does not end the debt. It also gives up your control of the sale process.
In Ontario the lender can pursue you personally for the shortfall. Stop paying, and the lender does not take the unit in satisfaction of the debt; it sells the unit under power of sale, applies the proceeds, and the shortfall, now with the lender’s enforcement costs added to it, is yours. What actually happens in a power of sale in Ontario, and how to hold the lender to account on every charge it adds, is on this site’s guide. The road from the first missed payment to that sale is on Behind on your mortgage in Ontario: what happens next, and what you can do at each stage.
So the difference between selling it yourself and walking away is not whether you owe the shortfall. It is how big the shortfall is, and who chose the price.
Pre-construction: I can’t close, or I can’t close at that price
A purchaser who cannot close faces a potential claim whose amount needs to be assessed. It is also a claim that the insolvency system can deal with, and knowing that changes the conversation with the builder.
If you bought pre-construction and the unit is now worth less than your contract price, you may not be able to get a mortgage for the amount you agreed to pay, and you may not be able to close. The deposit is at risk. The builder can resell the unit and sue you for the difference, plus its costs. Before relying on an assignment sale, have a lawyer review the contract and compare the possible proceeds and costs. A buyer, an acceptable price and any required consent are questions to resolve, not assumptions to build the plan around.
The builder’s potential shortfall claim belongs in the purchaser’s full debt assessment. Whether and how it can be included in a consumer proposal, as a claim that is not yet fixed in amount, is a question with an answer, and it is the most important question a purchaser in this position can ask before they sign anything with the builder. The answer is that a builder’s claim, even before a court has fixed its amount, is a claim the trustee values under the Act and can bring inside a proposal at that valuation, and a valued claim can even bring a purchaser under the consumer proposal’s ceiling. The estate’s full treatment of the failed pre-construction closing is a practitioner paper, and this page carries only its consumer summary.
Where a consumer proposal fits, and where it cannot
A consumer proposal can deal with the shortfall on a second property you have given up, and with the other debt around it, and it leaves the home you live in alone. What it cannot do is make an underwater unit worth more. And there is a ceiling, and the second property’s mortgage counts toward it.
Here is how it works in the ordinary case. You surrender the unit to its lender, or sell it with the lender’s agreement. The lender realises what it can. The shortfall becomes an unsecured claim, and it goes into the proposal alongside the credit cards and the line of credit used to cover the monthly gap. The proposal offers your creditors what you can actually pay, over up to five years, and when it is done, the shortfall is done. Your principal residence is not touched; you keep paying its mortgage and you keep the house. The shortfall goes into the proposal whether the unit is sold before you file or after, because the mortgage that produced it was on your books before you filed; the lender realises on the unit and files a claim for the balance. In a bankruptcy the same shortfall is released by your discharge.
Now the ceiling. A consumer proposal is available where your debts, leaving out debts secured by the home you live in, are within a set limit. The mortgage on the condo is not the mortgage on the home you live in, and it counts. For many owners of a second property, that mortgage alone takes them over the line. And the whole balance of that mortgage counts, not only the shortfall, for as long as you own the unit on the day you file. Sell or surrender it first and only the shortfall remains as a debt, which may bring you back under the line. The order in which you do things decides which door is open, and that is the first thing to work out with a trustee, before anything is listed or handed back. Over the line, the route is a Division 1 proposal, the same idea with different mechanics and different votes, explained on Division 1 Proposals in Plain Terms. Do not let anyone tell you a proposal is not available because you own two properties. If you are insolvent, one of the two is; it may just be the other one.
One structure changes the door entirely, and it is the one I most want you to check on title before you decide anything. If a private lender’s mortgage is registered against both the condo and the home you live in, one loan on two titles, that lender can refuse to release either property unless he is paid in full, unless the mortgage itself says otherwise. If the proceeds of one sale cannot pay him out, get the release terms, default rate and fees assessed with the lender and your lawyer before deciding what another period of holding would cost. A consumer proposal cannot make that lender accept less or release his security. A Division 1 proposal is different in two ways: filing it stays a secured lender from enforcing, which a consumer proposal does not, and it can be put to secured creditors as a class, binding the class if it votes for the proposal by a majority in number and two-thirds in value. How the classes are drawn matters, and it is real work. But the Act sets the test for who belongs together, and a lender who thinks he has been boxed in can ask the court to redraw them. What a trustee cannot do is draw a class to outvote one creditor for the sake of it. The house-poor page’s ladder puts this at the top rung for a reason.
The Consumer Proposal Resource Centre explains what a proposal is and how it works. The Consumer Proposal Calculator will show you what a proposal on your unsecured total, the shortfall included, would cost each month.
The equity in your own home changes the arithmetic
Equity in the home you live in affects the insolvency assessment and what a proposal must offer. Put its value and the mortgages against it into the full household calculation.
Your creditors measure a proposal against what a bankruptcy would have returned them, and in a bankruptcy the equity in your home is realisable once it is over the provincial exemption. In Ontario the exemption is a small threshold, and once your equity is over it, all of that equity is exposed, not just the excess. So a household with $300,000 of equity in the principal residence does not get the same proposal payment as a household with none; the equity is what the offer has to reflect. That is not a reason to avoid a proposal. It is the reason the payment is what it is, and it is why the calculator asks what you own. How the payment is set, line by line, is on How a consumer proposal payment is calculated. The person paying six thousand a month to keep that equity in a house they cannot afford is the subject of the next piece in this series.
The money you borrowed from family
One sentence here, because the whole conversation belongs elsewhere. If a parent or a sibling has been funding the shortfall, they are a creditor, what their loan becomes in a filing is a question with an answer you should hear before you decide anything, and the conversation you owe them is on the house-poor page of this series.
The tax and rebate questions you need an accountant for
There are tax questions attached to selling or surrendering a rental at a loss, this page does not answer them, and you should ask an accountant before the sale, not after.
Named as questions only, and all three are live: whether the HST new-housing rebate you received on a new unit is affected when the unit is sold or rented out earlier than the rules assume; what the sale or surrender itself does for tax, a gain or a loss and any change of use; and whether debt a lender forgives, or that is compromised in a proposal, counts as income under the debt-forgiveness rules, and whether those rules treat a proposal differently from a bankruptcy. Put those questions to an accountant who knows rental property before the transaction.
Common questions
Can I sell my investment property at a loss? Yes, with the lender’s agreement to discharge for less than it is owed. The loss does not disappear; it becomes a personal debt, and a proposal or bankruptcy is how that debt is dealt with.
What happens if I stop paying the mortgage on my rental? The lender enforces through a power of sale, sells for what it gets, adds its costs, and pursues you for the shortfall. Compare a voluntary sale before enforcement with the expected net proceeds and costs.
Can I keep my house and give up the condo? In a consumer proposal, yes, in the ordinary case: the condo goes to its lender, the shortfall goes into the proposal, and the home you live in is left alone so long as you keep paying its mortgage.
Does a consumer proposal cover the shortfall? Once the property is gone, the shortfall is unsecured debt, and unsecured debt is what a proposal deals with. A shortfall that arises after you have filed is caught too, so long as the mortgage was already on your books when you filed and the lender files its claim; ask before the sale all the same.
Is it better to sell now or wait for prices to recover? Run the table. At an assumed three per cent annual price increase, this model first clears the mortgage balance in year seven, after $75,600 of additional cash payments. It has not recovered those payments. Compare that cost with a sale and a plan for the shortfall today.
The analysis behind this page
The rules on what a proposal reaches, on the ceiling that separates a consumer proposal from a Division 1 proposal, and on how equity sets the payment are on the Consumer Proposal Resource Centre, Division 1 Proposals in Plain Terms and How a consumer proposal payment is calculated. The enforcement road is on this site’s power-of-sale guide and its companion. The table is arithmetic on explicitly illustrated inputs, not a market forecast or a current cost quote. This page is general information about Ontario law and not advice about your situation.
Can’t find your answer here?
This site is built to answer these questions properly, and most of the time it will. If yours is not here, send it to me. I read them myself, and I answer them personally.
If what you want is to understand your next steps, I can help you with that directly in Ontario. The first thing I will do is assess whether you are insolvent under the Act; if you are not, I will say so. The other Licensed Insolvency Trustees I work with can assist across the rest of Canada.
