In Ontario, Canada, when a mortgage lender mentions that a “pricing adjustment may apply to price to risk for bankruptcy/proposal in the last 12 months,” it means that the lender is considering the increased risk of lending to someone who has declared bankruptcy or made a consumer proposal within the last year. To compensate for this higher risk, the lender may adjust the pricing of the mortgage. This typically results in a higher interest rate or additional fees for the borrower.
What is Bankruptcy?
Bankruptcy in Ontario, Canada, is a legal process designed to provide relief to individuals (and businesses) who cannot meet their debt obligations. It is governed by the Bankruptcy and Insolvency Act (BIA), a federal law, which means the rules and procedures are consistent across Canada, including Ontario. However, the process is administered by Licensed Insolvency Trustees (LITs), who are professionals licensed by the Office of the Superintendent of Bankruptcy (OSB) to manage bankruptcy cases.
Key Features of Bankruptcy in Ontario
What is a Consumer Proposal?
In Ontario, Canada, a consumer proposal is a legal process designed as an alternative to bankruptcy for individuals unable to pay their debts. It allows debtors to make an arrangement with their creditors to pay back a portion of their debts over a period of time, up to a maximum of five years. The process is governed by the Bankruptcy and Insolvency Act (BIA) and must be administered by a Licensed Insolvency Trustee (LIT).
Key Features of a Consumer Proposal in Ontario
Coming Out of Consumer Proposal or Bankruptcy
Bankruptcy and Consumer Proposals
Declaring bankruptcy or filing a consumer proposal are legal processes that allow individuals to address their inability to pay off their debts. Bankruptcy usually involves liquidating assets to pay off creditors, while a consumer proposal is an agreement to repay creditors a portion of the debt over a specific period. Both significantly impact an individual’s credit score and are indicators of high credit risk to lenders.
Risk Pricing
Lenders assess the risk of lending money based on various factors, including credit history, income stability, and past financial difficulties such as bankruptcy or consumer proposals. Borrowers who have recently gone through bankruptcy or a consumer proposal are considered higher risk because these actions suggest they have had significant financial difficulties in the past.
Pricing Adjustment
To mitigate the increased risk of lending to someone with a recent bankruptcy or consumer proposal, lenders may adjust the cost of borrowing. This adjustment can take the form of higher interest rates compared to what is offered to borrowers with stronger credit histories. Alternatively, or in addition, lenders may require higher down payments or charge additional fees.
Impact on Borrowers
For borrowers who have experienced bankruptcy or a consumer proposal in the last 12 months, this means that obtaining a mortgage may be more expensive. The exact terms and how much more they will have to pay depend on the lender’s policies and the specific risk assessment of the borrower’s financial situation.
Advice for Borrowers
If you’re in this situation, it’s beneficial to shop around and compare offers from different lenders, including alternative lenders who specialize in serving borrowers with less-than-perfect credit histories. Additionally, working with a mortgage broker can help navigate the complexities of securing a mortgage post-bankruptcy or consumer proposal, as they can offer advice and connect you with lenders more likely to accommodate your financial history.
It’s also important for borrowers to focus on rebuilding their credit and demonstrating financial stability, as this can help improve the terms of a mortgage over time.
