Updated April 6, 2020
Canada’s banks, credit unions, trust companies, mortgage companies, and even some alternative lenders have announced they will be assisting borrowers during this disruptive time caused by the coronavirus pandemic.
Lenders this week communicated they will be working with individuals that are in need of financial assistance due to job loss, business interruption, or quarantine from COVID-19.
Most lenders have implemented up to a 6 month deferral of mortgage payments. Some lenders are deferring payments month by month.
It’s important to note that payments are not being waived, they are being deferred/delayed.
This means the payments that aren’t made, continue to accrue interest on the mortgage, essentially paying interest on interest. This does increase mortgage holders overall interest cost, however it helps resolve temporary cash flow shortages. After the deferral period, lenders will slightly increase borrowers mortgage payments to catch on the skipped payments, will require lump sums paid by the end of the term, or they will experience an extended amortization period on their mortgage. Note some lenders are requiring the payment of interest
What are the qualifications to defer your mortgage payment?
Every lender is handling this differently however every lender is deferring payments on a case by case basis. This is not available for all borrowers. Mortgage holders dealing with financial hardship directly driven by COVID-19 may be offered a temporary payment solution. Individuals qualify to defer their payment if they experience a material reduction of income due to COVID-19 including the following criteria:
– Loss of employment due to employer closing
– Loss of income due to employer temporarily closing
– Business revenue loss
– Requirement to be quarantined or prolonged sickness resulting in loss of income
This is not a full and complete set of criteria but it seems to fit most lenders requirements, however each lender will have their individual set of criteria.
Should you or shouldn’t you defer your payment?
Simply put, if you are concerned with cash flow over the next few months … defer your payment.
If you have no effect (and aren’t forecasting an effect) to your income/cash flow, then there’s no need to waive.
In uncertain times like this, cash is king. So think of your worse case scenario, and if that scenario is worrisome, then take the deferment. If things never get to that worse case scenario, you can always lump extra money back onto your mortgage. Better to have a cushion with your payment deferred, then to miss your mortgage payment.
How do I apply to defer my payment?
Mortgage holders are to contact their existing lender(s) and provide them their story on why they are in need of deferring mortgage payments. Some lenders have designated contact information on their websites for this purpose (see list at the bottom of this page).
Inquiries with lenders are at extreme high levels at initial announcement of payment deferrals. Before wasting time borrowers are encouraged to ask themselves “Am I currently being directly impacted financially by COVID-19?”, if the answer is “Yes”, then lenders are welcoming calls. Any non-rush inquiries are encouraged to wait until the initial rush subsides.
How will payments look to “catch up” after having payments deferred?
Every lender has their own policy on how they will allow borrowers to “catch up” on deferred payments. We feel the most popular method will be a slightly increased payment for the rest of a borrowers mortgage term and this is the example we will review…
6 months of deferred payments
27 years amortization remaining.
With every mortgage payment a portion of the payment pays the interest, and the other portion pays the mortgage down. We will assume that with each payment $225 pays down the mortgage balance, and $225 pays the interest. Therefore in 6 months there will be interest of $1,350 owing (6 months x $225) on top of the $100,000. In 6 months the mortgage looks like this before the increased payment:
27 years, 7 months amortization remaining.
6 months have passed so there should be 26 years, 6 months amortization remaining. The lender would then reset the payment to “catch up” on the original amortization schedule. So the mortgage looks like this with the increased payment:
26 years, 6 months amortization remaining
In this example the borrower sees $11/month increase in payments after the 6 months of not making payments.
Take this example and apply it to your mortgage. If you have a $500,000 mortgage your payment would be increased by $55/month ($11 x 5) if you take the option of deferring your payments for 6 months.
(Note that this is strictly an example. A mortgage balance owing in 6 months would be higher than the $101,350 in this example as you will accrue interest on the interest not paid. Payments are estimated. Amortizations are estimated. The portion of interest and principal paid with each payment will be unique to your mortgage as well as how the interest on your mortgage is compounded. The numbers used are rough estimated figures but they are accurate enough to give you an idea of how your mortgage will look in 6 months.)
Now this is just one example of how a lender may defer and “catch up” a payment. Some lenders require borrowers to pay the difference of the waived payment off within 48 months, which would cause a much more significant increase to monthly payments). Others are requesting partial payments, or interest only payments. Borrowers must inquire with their lender to determine the options available to them. Most lenders are working with borrowers on an individual basis providing customized plans.
What are the effects to a borrowers credit by deferring a payment?
It is unclear of the effects on a borrowers credit score at this time. As this is an arrangement a mortgage holder will be making with their lender, prior to default, it should not appear as a missed payment, and therefore should have little effect on credit scores. However this is definitely not to be left to assumption. A missed mortgage payment reflecting on a credit bureau is taken very seriously by any lender and would affect a borrower for years to come so borrowers should confirm with their individual lender the effect deferring a payment will have.
What are some alternatives a borrower can leverage instead of deferring a payment?
Withdraw from savings or investments. If investments are locked into a certain product, discuss options with your lender. They may allow redemption given the situation or may be able to provide a loan against those investments.
Leverage a line of credit. If savings are low or investments are inaccessible, mortgage holders can leverage a line of credit they may have to bridge them through the time of low cash flow. Borrowers are encouraged to really analyse what the best solution is for them in the long term. If they feel they will be able to pay down the line of credit quickly, this would be a good option. If a mortgage holder sees themselves out of income for a prolonged period, then they may be best to keep their lines of credits open in the event they need to be leveraged as well as the deferred payments.
Mortgage re-structure. A mortgage refinance or a 2nd mortgage may be an option to provided extra cash reserves or to clear up existing debt. Contact us to discuss this.
Are payment deferrals possible on all properties (ie. rental/revenue/second homes/vacation properties)?
At this time it is unclear how lenders will be handling these cases and borrowers are encouraged to inquire with their lender. Landlords that have been notified of employment issues by their tenants should contact their lender if missed rent payments are expected. Landlords should have open conversations with their tenants so both parties can prepare.
Can I defer my payment on my loans and credit cards?
Some lenders are offering this as well and borrowers are encouraged to inquire with their specific lender.
Can I defer my payment on my Life and/or Disability and/or Critical Illness Insurance?
Some lenders have been clear that they will not be waiving Mortgage Life/Disability/Critical Illness Insurance premiums, however borrowers are encouraged to inquire with their insurance provider. For those that have Bank-specific Mortgage Insurance please reach out to us and we will refer you to our financial planning partner that can likely save money on that payment (and provide a proper policy).