When the coronavirus pandemic hit Canada in mid-March, thousands of businesses were forced to shutter and many people lost their jobs. In an effort to help people keep their homes while the country waits for the economy to fully reopen, the big banks began offering struggling Canadians deferrals on their mortgage payments.
According to the Canadian Bankers Association (CBA), 775,000 Canadians had deferred their mortgages as of July 2020, representing $180 billion in deferred payments. Of course, the deferral program didn’t mean that borrowers could simply skip six months’ worth of payments. Their total mortgage amounts remained the same, and they are still obligated to repay the entire loan eventually, plus interest.
When the first deferral period came to an end in late August, banks offered borrowers a second and final deferral payment option, this time for three months. That deferral period expires at the end of December, when borrowers will be expected to resume monthly payments. But what happens to those who can’t?
Below, we consider some options for homeowners, including those who expect to return to a regular cash flow sooner rather than later, and those who expect their money challenges to stretch into the long term.
Ask your lender for additional financing
If you expect your cash flow to return to normal soon, asking your lender for additional financing is an option worth considering.
You can do this a number of ways. One is by taking out a home equity line of credit (HELOC), which is a loan secured against the equity you’ve built in your home. Another option is a personal line of credit. Of course, if neither of these options suit your circumstances, you can always talk to your lender about alternative forms of financing that can help you pay off your mortgage.
Talk to your lender about an extension
‘You never know unless you ask’ is sage advice that can be applied to almost any area of personal finance — even deferrals.
If you expect your income to return to normal in a couple of months, a deferral extension could come in handy. Some lenders have indicated they will work one-on-one with homeowners to find a solution that works for them. So, if you can prove that you need an extension, you might have some luck with this option.
Add a co-signer
This is an option for homeowners struggling to make mortgage payments on their own and at risk of losing their mortgage. Reach out to your lender and ask if you can bring on a co-signer to your mortgage — preferably someone who has assets that could be secured against the loan. This would likely help quell any fears your lender has of you defaulting, and could potentially help you hang on to your mortgage in the short-term.
Refinance your home
This option is ideal for homeowners who expect their money challenges to stretch into the long term and need to find a solution that will get them through.
People refinance their mortgage in an effort to find a lower interest rate and sometimes consolidate other debts. A refinance can also be a valuable way to access your home equity. If you’re looking for lower monthly payments over the long-term, refinancing can help. Keep in mind, however, that if you break your mortgage term early, you will likely need to pay a large penalty. As well, if you’re switching from one lender to another because of a better rate, there may be fees associated with discharging your mortgage from your old lender to your new one.
Increase your amortization period
Your amortization period is the length of time it will take you to pay your mortgage off in full. The longer your amortization period, the more interest you’ll pay, and vice versa.
Asking to increase your amortization period is an ideal option for homeowners who expect their money challenges to stretch into the long term. Spreading your mortgage payments over a longer period can help ease stress on your current cash crunch, even though it means you will pay more interest in the long run.
Sell your home
This is of course a last-resort option for homeowners who expect their money challenges to persist and can’t see a financially prudent way out of their current cash problems.
The best way to know whether it’s wise to sell your home is to make projections for your financial situation for up to a year out. Look ahead and see, realistically, what’s in the cards for you in terms of job prospects, income, as well as other debts that you have to pay. And consider the amount of savings you currently have. Is it better to get out now with that money in hand and some equity? Or are there benefits to waiting it out a little longer? These are questions you’ll have to ask yourself.
Explore all your options before making a decision
While some homeowners will be able to resume payments after December, others might be forced to sell. There’s no one-size-fits-all approach when it comes to navigating the financial pitfalls of a pandemic. So explore all of your options and find out which one best suits your current and future needs. This might involve sitting down with your bank or a financial planner to sort through the confusion, but it will be well worth it.
With files from Jessica Vomiero.