Living through a global pandemic is stressful enough, but homeowners whose income has been affected by the coronavirus may also have the added worry of defaulting on their mortgages. To help Canadians in these unprecedented times, the federal government and the country’s financial institutions are working together to provide options, including payment deferrals, for mortgage holders who are struggling.
But the relief on offer may not be exactly what you think it is. To make sure you understand all the pros and cons of deferrals – and the other alternatives available – we’ve put together this guide to help you understand what’s really happening with COVID-19 and mortgages.
What Is the Government Doing to Help Mortgage Holders During COVID-19?
Canada’s federal government is taking a multi-pronged approach to help mortgage holders financially, which includes the following:
- Lowering interest rates. The Bank of Canada dropped its benchmark overnight rate by 150 basis points (or 1.5 percentage points) in March. Canada’s big banks followed suit by lowering their prime lending rates to 2.45% from 3.95%. This will provide immediate relief to those who have variable rate mortgages, which will decrease the interest portion of their monthly payments. Unfortunately, the same does not apply to fixed-rate mortgage holders – unless they refinance. Even then they might not be better off, as we explain later on.
- Providing income support. If you are not able to work or your income is reduced, you may qualify for Employment Insurance, the new Canada Emergency Response Benefit (CERB), and/or enhanced HST Credit and Canada Child Benefit payments. These emergency benefits may help you pay your mortgage during the COVID-19 crisis.
- Encouraging banks to show flexibility. The government agreed to purchase $50 billion of insured mortgage pools through the Canada Mortgage and Housing Corporation (CMHC) to provide extra funding to banks and mortgage lenders. In exchange, the finance minister asked financial institutions to use that additional lending capacity to support Canadian businesses and households experiencing financial hardships from COVID-19, including pay disruption, childcare disruption, or illness.
In response to the finance minister’s plea, Canada’s large banks and some other lenders agreed to offer clients, on a case-by-case basis, mortgage payment deferrals on primary residences for six months.
It’s important to note, however, that it’s up to borrowers to contact their individual lender directly to ask for assistance. Given the huge demand, it may be difficult to speak to bank representatives directly. Many requests are being submitted online and awaiting approval.
Also, there’s no obligation for the lender to grant your request. If, for example, you have money saved up in a bank account – even if it’s at another financial institution – your request for a mortgage deferral may be denied if there is an expectation to exhaust your savings first.
By April 6, less than three weeks after the finance minister announced the measure to the public, nearly half a million Canadians had already submitted mortgage deferral requests, according to reports from the Canadian Bankers Association. The organization says the country’s Big Six banks – RBC, TD, BMO, CIBC, Scotiabank and National Bank of Canada – have already deferred more than 10% of the mortgages in their portfolios. This figure also includes the usual “skip a payment” option offered in many original mortgage contracts, which allows for one payment deferral per year.
Be advised that a deferral is not free money or debt forgiveness. Anyone who defers their mortgage will have to catch up on the missed payments later and will likely also end up paying more in interest overall, as explained below.
Should You Ask for a Mortgage Deferral?
A mortgage deferral request is best limited to individuals who risk losing their homes without one. Here’s why.
A deferral is basically hitting “pause” on your mortgage, so whatever your mortgage balance was at the time you start to defer payments will still be owed. More troubling, your total mortgage balance will actually increase, because the interest portion of your usual payments will be tacked on to your principal owing. That means once you resume making payments, they will be higher than they would be otherwise, and/or your amortization period will increase. In effect, you will be paying interest on your missed interest payments.
Even if you ask to defer only the amount that would be paid toward the mortgage principal, and continue to pay your interest as usual for a six-month period, you’ll still be out of pocket by an extra six months’ worth of interest payments. When the six months are over, you’ll “unpause” your mortgage and continue with your usual payments as they were before, but you’ll have increased your amortization period by six months.
Any way you look at it, if you take a deferral you’ll be paying more in interest over the life of your mortgage than if you continue with your payments as usual. And, if you find you still cannot make your payments at the end of the deferral period, you may wind up defaulting on your mortgage at that point anyway – only with additional debt.
It is also unclear whether taking a deferral under this program will have any bearing on a borrower’s credit score. As such, a deferral should not be taken lightly. If you can find a way to make payments by accessing some of the COVID-19 income relief measures, that will likely serve you better in the long run. For instance, taking out a personal loan may be a better short-term solution. Loans Canada is the largest lender network in Canada and can help you find the best personal loan to suit your financial circumstances. It offers loans up to $50,000 and interest rates start as low as 5.15%.
What Else Can You Do About Mortgages During the COVID-19 Crisis?
If you are having difficulty making your mortgage payments because you cannot work, your first line of defence should be to access whatever income supports you can through the new government programs and to exhaust any emergency funds you have saved, as mentioned above.
If you don’t qualify for any benefits, or if the sum provided is not enough to cover your mortgage and other necessities, here are a few other options available if you don’t want to defer your mortgage, or if your request for a deferral is denied:
- Borrow from your home equity line of credit (HELOC). If you already have a HELOC, which is a line of credit secured by the equity in your home, you may be able to borrow from it temporarily to make your mortgage payments. However, you’ll have to continue to pay interest on any outstanding amounts on your HELOC. An important caveat: the terms of most HELOCs allow the lender to recall all debt owing at any time. While financial institutions rarely do so under normal circumstances, it’s possible they will increasingly leverage this option as their profit margins narrow.
- Extend your mortgage amortization. If you think you’ll be okay with a reduction in the size of your mortgage payment, rather than deferring payments outright, extending your mortgage amortization might be a good solution. By increasing the period over which your mortgage balance is paid, each payment will be lower. The drawback? You’ll pay more in interest over the life of your mortgage. If you happen to be near the tail end of your amortization anyway, the additional interest shouldn’t be too onerous.
- Refinance your mortgage. Depending on the terms and size of your current mortgage, refinancing could lower your payments significantly – especially if you can benefit from the lowest prime rates in over a decade and any penalties you incur aren’t too steep. Keep in mind, however, that refinancing requests may not be a current top priority for lenders now inundated with calls. You may have better luck breaking your mortgage and switching to a different lender, who will be more eager to sign you as “new business,” but you’ll have to pass the mortgage stress test to qualify. Some lenders are even offering incentives to switch at the moment. BMO, for example, has a one-month payment cashback offer on its 5-year fixed rate closed term mortgages, with a minimum amortization period of 25 years and a principal amount of at least $50,000.
- Sell your home. If you were already on the brink before the coronavirus crisis, an interruption in your income of undetermined length could send you over the edge. Instead of defaulting on your mortgage and ruining your credit, you could sell your home, pay off your debt, take any equity and rent. Some owners of short-term rental properties, such as Airbnbs, may be looking to switch over to longer-term leases with the lack of bookings, so it could turn into a good market for renters.
- Consult a licensed insolvency trustee. You may be able to set up an arrangement with your creditors called a consumer proposal. It could lower your payments and let you stay in your home and keep any retirement assets.
The Final Word
If you are worried about making your mortgage payments, begin by accessing all of the income support benefits available and tapping into your emergency funds.
Next, contact your lender to see what temporary measures you can agree upon to get you through this rough period, whether that be a mortgage deferral, longer amortization, borrowing against your HELOC, or refinancing/switching to a new lender. Just be sure to enter into any of these arrangements with your eyes open about extra interest charges or penalty fees that may apply.
Finally, if there are no other options, consider selling your home, or file a consumer proposal with the help of a licensed insolvency trustee. Also, keep checking Young & Thrifty for updates since the government is continually updating their relief efforts. It’s possible it will eventually require banks and other lenders to provide further assistance for homeowners.