For those of you who follow me on Social Media, you may have seen my video post on deferring mortgages. Much to my surprise, that post was hugely popular with tons of shares, comments and views! I figure one of two things were happening, either people have a lot of extra time on their hands, or they really are wondering about deferring their mortgages.
What’s the deal?
The big six banks (TD, RBC, CIBC, Scotia, Bank of Montreal and National) have decided to offer up to six months of mortgage deferral in light of the COVID-19 crisis facing Canadians. Between lay-offs, small business closures and loss of investment income, many Canadians are facing an immediate shortage of funds. While this program can be a lifesaver for some, it should not be taken lightly. Here are a few things to keep in mind.
1. This is a deferral NOT a forgiveness program
This is the most important point for you to understand; your lender is not giving you a pass on paying your mortgage. You will be required to pay the portion deferred and you will also be charged interest on the interest owed! This could be a significant amount of additional money you end up paying over the course of your mortgage.
In terms of repayment, each financial institution will have its own structure. Some will tack the owed interest on to the remainder of your term so your payments after the deferral will be higher than they were before. Others will adjust the amount owing at the beginning of your next term. Your payments will stay the same after the deferral but you will pay more interest over the life of the mortgage. It’s so important to understand your lender’s rules and how that will impact you in the short and long run.
2. Not everyone will be approved
Each lender will have their own criteria to decide whether they will approve an applicant for a mortgage deferral. They will ask a series of questions and decide on a case-by-case basis. So if, for example, you are thinking that it may be nice to save some cash right now, but your household income has stayed the same, the lender may not approve you. Most lenders will want to see proof of financial hardship. Due to the extremely high volume of calls, wait times were initially 4 to 5 hours! More recently, many lenders have begun offering online applications or appointment scheduling to help alleviate the problem.
3. Each Financial Institution will have its own rules
This program was thrown together very quickly and the rules are pretty grey. As has already been mentioned, each lender will have its own set of rules around criteria for approval, re-payment terms, etc.
4. You may have better options available
Your mortgage may have other features that can help you at this time, and save you from a long deferral. Most major lenders will offer a “skip a month” option. While you will still owe interest on a skipped month, perhaps one month is all you need. RBC has an online calculator to see how much interest the skip-a-payment will cost you:
https://www.rbcroyalbank.com/mortgages/widgets/skip-a-payment/index.html?&payment=1200
Alternatively, you may be able to restore your original amortization to reduce your monthly payments. For example, if you originally had a 30 year amortization, and now you are at 25 years, you can ask your lender to re-amortize you out to 30 years.
5. Your Credit score, will it take a hit?
Right now the word is, no. Financial institutions are saying that because this is an approved deferral, missed payments will not be reported to the credit bureaus. However, once again, because every lender is different and the rules can change, it is best to discuss this with your lender and consider getting it in writing.
So, should you defer?
The most important point to remember here is that in the long term you will be paying more. Six months of missed interest can really add up, especially when you will be paying interest on your interest. If you have other choices, or are just trying to save on monthly expenses, this may not be your best choice. However, if this program will allow you to keep your home, then you should definitely consider it.
For more questions or to chat, please reach out to me anytime. I’d love to hear from you!
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