By Sheila Walkington BBA, CFP®
As the financial impact of COVID-19 is being felt by more and more Canadians, we are working with our clients to help them find the best solutions for their circumstances. There are many financial support programs offered by the government, banks and businesses that are emerging. Details are still being worked out, and in some cases changing which can be frustrating when trying to make informed and responsible decisions.
With this in mind, we will share the most pressing questions our clients are asking and the information and advice we’re providing. As new information emerges, we will do our best to keep you updated and informed on how we are addressing the issues with our clients.
Should I defer my mortgage payments?
If you are experiencing financial hardship from income loss or reduction due to COVID-19 and don’t have the means to pay your mortgage, then it may make sense to apply for a deferral with your lender.
It is up to each lender to decide whether you qualify based on their qualification guidelines. Most financial institutions are allowing deferrals of up to 6 months if you don’t have any other means of making your mortgage payments.
Applying for the deferral:
Before contacting your lender, take a close look at your income and expenses. Are there other expenses that you can reduce or eliminate? Do you have savings you can draw on? While it may be appealing to push off mortgage payments now, it could be costly later so be sure you’ve considered all your other options first.
Look into what government support programs may be available to you. Depending on whether you are an employee or a business owner, you may qualify for one or more of the many programs under Canada’s COVID-19 Economic Response Plan.
If you feel that there is a risk that you could default on your mortgage, then contact your lender as soon as possible. Be patient, lenders are extremely hard to get a hold of now. Use online portals as available.
How does the deferral work:
According to Vancouver based mortgage broker Marci Deane, each lender has created a policy around the deferral program. In some cases, the lenders default to a 6-month deferral and it’s up to the borrower to call/email to stop the deferral. For other lenders, it is month to month. In that case, borrowers will login or email their request to skip payment the following month.
Again, depending on the lender, interest will either be added to payments after the deferral or it will be added to the mortgage balance at the end of the term which will result in larger payments later.
Here are a few examples from bank lenders:
TD: Payments will be adjusted automatically at the start of your next term or, if you change anything else before renewal, at that time, to ensure your mortgage is paid off at the end of your original amortization period.
Scotiabank: A mortgage payment deferral means that payments are skipped for up to 6 months, during which interest is accrued to the outstanding balance of the mortgage. The amount is incorporated into the monthly payment when mortgage payments resume at the end of the deferral period.
CIBC: The interest that accrues during the deferral period will be added to the principal balance of your mortgage to provide you with immediate payment relief while experiencing temporary hardships. As a result, once payments resume, you will continue to pay interest on the principal, and your payments may increase after the deferral period.
Will my credit score be impacted?
Mortgage deferrals are not expected to have any impact on your credit rating as long as the request was made and approved. If you simply skip a payment without an approved deferral, then your credit score will take a hit. Given the volumes of requests, there will be errors, but all lenders are saying they will work to correct any issues if they arise.
Should I consider other options?
I asked Marci to weigh in: “Payment deferral isn’t the only option you have. You may qualify for a mortgage refinance, a restoration of your original amortization to lower your payment or negotiated reduction of payments.”
The purpose of the mortgage deferral is to relieve short term financial challenges due to reduced income. As with all money decisions, the best course of action for you is dependent on the full context of your unique life circumstances and your overall financial plan.
Don’t hesitate to reach out to us. We’re here to help.