When some mortgage lenders, including Canada’s big banks, announced that they would provide mortgage borrowers the ability to defer their mortgage payments, there was a general sigh of relief from homeowners across the country facing financial hardship due to COVID-19.
According to Canada Mortgage and Housing Corporation (CMHC), a deferral is an agreement between you and your lender (your bank or your mortgage professional) indicating that you have agreed to pause or suspend your mortgage payments for a certain amount of time.
Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, and National Bank of Canada customers who have been impacted by the new coronavirus can apply, as long as their mortgages are insured and in good standing.
Other lenders like RMG Mortgage and private mortgage insurers like Canada Guaranty and Genworth Canada are also offering mortgage payment deferrals.
Since the announcement was made two weeks ago, BNN reported that “more than 213,000 requests to defer or skip payments have been completed or are being processed, according to Mathieu Labreche, a spokesman for the Canadian Bankers Association. In less than 10 days, the banks have deferred payments or are processing deferrals on about 4.5% of the total number [of] mortgages in their portfolios.”
At first glance, it sounds like this is a helpful solution for homeowners affected financially by COVID-19. But what are the consequences of deferring payments on your mortgage?
Deferment doesn’t mean cancellation
Iyana Arlain, mortgage agent at Centum Lending and Mortgages, says that many people don't understand that mortgage deferral is just a “temporary solution.”
It doesn’t cancel, erase or eliminate the amount you owe on your mortgage. Instead, payments are skipped for a period of time, and the interest accrued is added to your mortgage’s outstanding balance. So, at the end of the agreement or at your next renewal period, you will have to resume regular payments, and those payments will be higher thanks to added interest.
An example provided by CIBC illustrates this well. A client with a mortgage with an original principal balance of $100,000 amortized over 25 years at a 3% interest rate has a monthly payment of $473.25. If the client then defers the next six monthly payments, the interest portion of those payments will be added to the principal balance of $85,474.30, resulting in a new principal balance of $86,738.71. Because the new principal balance has now increased, the monthly mortgage payments will increase, too, to $489.26.
“Everybody has to look at their own situation,” says Arlain, “and count the cost of it.”
It depends on the lender
It’s important to understand that you aren’t automatically approved for the deferral program, nor is the six-month deferral guaranteed. Lenders are granting mortgage payment deferrals on a case-by-case basis. Depending on your situation, your lender might only grant you one payment deferral.
Richard Moxley, credit expert and former mortgage broker with eight years’ experience, urges homeowners to reach out to their lenders only if necessary. A lot of people are having trouble getting access to their lenders during this time because of the high volume of calls and requests.
“What it comes down to is: Can you afford to make your payments?” says Moxley. “If you can't, the deferral program is available.”
But don’t just assume you can skip payments without reaching out to your lender first.
“You don't want to just put your head in the sand and miss a payment,” cautions Arlain. “For those dealing with mortgage payment difficulties who have to take advantage of the program, it's really helping them to stay afloat and to get back on their feet. If they get approved for it, I think in the long run it's better than missing a payment.”
Does mortgage deferral affect your credit score?
Moxley says it’s too early to know how deferring mortgage payments will affect your credit score but keep in mind it’s possible that a deferred payment could actually show up as a late payment on your credit report.
That’s because the credit reporting system used by Equifax and TransUnion doesn’t qualify the information they receive from lenders, and it’s generally automated.
Moxley’s message is to remind Canadians that errors can happen quite frequently on credit reports so the best thing to do is to learn how to protect yourself the best you can.
“Check your credit over the next few months to see if there are errors,” he says. “It's much better to dispute any errors now as opposed to assuming everything is okay, only to find out and your credit is significantly impacted by an error.”
“In the past, a late payment [has been] enough to essentially get a mortgage declined.”
If you do decide to defer your mortgage payments, Moxley recommends:
- Obtaining something in writing, even electronically
- Getting the customer representative’s phone number or name
- Keeping track of all the correspondence with your lender by writing the time and dates you communicated