Over the course of the COVID-19 pandemic, the economy took an unprecedented tumble. As businesses shuttered to abide by the rule of law and ensure the safety of their staff, many were left without a steady source of income. Though there were aid packages made available, they were often insufficient for households to make their mortgage payments. To assist, many banks and lending institutions offered mortgage deferrals.
Over 795,000 mortgage holders took advantage of this assistance. It enabled households to effectively put-off payments on their mortgage, without the risk of default or foreclosure. With a mortgage deferral, homeowners will still need to pay the amount deferred, just at a later date where, hopefully, their financial situation has improved. Though deferral programs offered a much-needed reprieve over the short term, approximately 63% of those using the deferral arrangements had to resume payments on September 30, 2020.
Despite the programs ending, many have yet to return to work or still find themselves in a position where they are struggling to make their mortgage payment. The good news is that there are certain financial steps that can be taken to ensure your mortgage remains in good standing. By gaining a full understanding of your options, you can choose the best route for your needs.
Financial Relief Options After Your Mortgage Deferral Ends
When you’re approaching the end of your mortgage deferral process, it is important to reassess your finances. If you will require further assistance, it is important to gather information about the options available to you.
Lower Payments by Extending Your Amortization Period
One approach you can take is to reassess your mortgage after the deferral concludes and make changes to the terms, if possible. A potential approach is to stretch the duration of your mortgage itself. When you lengthen the amortization period of the loan, you can reduce the amount you need to pay each month. Though it will result in you paying more over the long term, it can give you a much-needed level of assistance, especially if you don’t have the funds to pay a higher amount.
To achieve this, you will need to make arrangements directly with the lender holding your mortgage account. Ultimately, the lender makes money from you making your payments. As a result, this incentivizes the financial institution to help you keep making your payments. They will make the money back through the interest accrued during the extended term of the loan. It benefits both parties and mitigates the risk of foreclosure.
Switch From a Variable to a Fixed Rate
Those with a mortgage have the opportunity to convert their mortgage from a variable rate interest to a fixed-rate interest. There are a couple of factors to consider when you are thinking about making the switch. The first is the specific lender with whom you are dealing. Since the lender is the party that sets the fixed rate in question, the success of this solution depends on whether they offer a competitive rate.
Sometimes, variable rates are a good approach. They give you the opportunity to save in the event that interest rates lower. However, when there is so much uncertainty in the world, it often makes sense to opt for the stability and security of a fixed rate. It means that you know what your payment is going to be and can budget accordingly. Plus, if the fixed rate offered by your institution is reasonable, it can offer a bit of saving both upfront and down the road.
Create a Special Payment Plan With Your Financial Institution
Ultimately, the lender needs to recuperate the money from the mortgage holder in order to see a profit. The COVID-19 pandemic created a unique atmosphere for borrowers and lenders alike. Unlike situations where only a few households need assistance, the pandemic created a widespread need for help. When there are fewer people relying on assistance from lenders, it may be easier for the bank to simply foreclose. However, with the mass amounts of people leaning on their financial assistance, it makes more sense for an institution to provide assistance to borrowers.
If you find yourself needing further help after your deferral period comes to a close, and if neither changing from variable to fixed interest or extending the amortization period will work, you can reach out to your lender directly. There are a couple of different ways they can accommodate your needs.
Discuss Reducing Your Monthly Payments
The first is through lower payments. While you will need to pay the full amount of the loan, the lender may be able to lower your payments temporarily. Though you will ultimately have to pay the full balance owed, this can be a suitable solution for those who need an immediate reprieve. It is especially useful for those still waiting for their work situation to regulate, or who are needing to compensate for expenses incurred during the pandemic lockdown.
Consider Interest-Only Payment Arrangements
Another approach to discuss with your lender is the potential for Interest-only payments. Again, this is a temporary method that can be used to help you get back on your financial feet. The principal payment amount will need to be paid eventually; though, over the short-term, you can pay only the interest accruing on your loan.
Capitalization
This refers to the process of tacking expenses onto the overall amount of your mortgage. It is more common to see this with things such as closing costs, though capitalization is also common for deferring interest amounts. It gives you a chance to take the amount you deferred and effectively add it to the base amount of your mortgage loan. Unlike some other options available, this is more of a long-term solution. In order to go through the loan capitalization process, you will need to speak directly to your lender.
Alternative Lenders
Especially if you are struggling to make payments on multiple loans, seeking out an alternative lender can be a viable solution. It gives borrowers who are struggling with debt an opportunity to simplify their finances and save money simultaneously.
Debt Consolidation
An alternative lender can purchase your debt and lend it back to you as a single loan. It gives you a single interest rate and a single payment to make.While alternative lenders won’t purchase your mortgage, they can buy out the other debts you have. Saving money on these payments can free up funds to pay your set mortgage amount. It can also reduce your interest rate and result in your paying less over the long term.
Interested in debt consolidation? Then check out bad credit debt consolidation.
Consider Getting a New Loan
Another way to approach an alternative lender is to pursue a new loan. You can use these funds to make your regular mortgage payments. This is particularly useful when you get good terms on the new loan, in terms of interest, duration, and payment amounts. If you adjust your regular (weekly, bi-weekly, or monthly) payments to a lower amount, it can free up funds over the short term.
It’s important to note that taking out a new loan will increase your debt. Prior to entering into an agreement, consider the long-term ramifications of this new debt amount. If you will be able to afford the higher amount once the world recalibrates to the new normal, then it can be a viable approach.
Visit a Financial Advisor
If you are unsure as to how to proceed with your financial planning in this current economic landscape, a financial advisor can offer a lot of help. These trained professionals are experts in the field of money management. When you meet with a financial advisor, not only do you get an objective set of fresh eyes on your situation, you get the benefit of their knowledge.
Financial advisors can help you budget your income. They can assist you in finding an approach that works for you not only in the near future but further down the road. Financial crises are unplanned and unexpected situations. As a result, when the world changed over the course of the COVID-19 pandemic, many households found themselves less than prepared for the situation. In order to figure out how to proceed responsibly in terms of debt management, the savvy of financial advisors is incomparable.
Final Thoughts
Mortgage deferrals, along with government-provided financial assistance programs, helped hundreds of thousands of Canadians.Though some were able to use the deferral period to get back on their feet, many are still struggling. If you are having a difficult time with mortgage and other debt payments, there are options available.
Just like with all financial matters, the first step is making a budget. Get a complete picture of your financial landscape, factoring in the impact of your mortgage deferral. Use this information to conduct thorough research as to your options. Especially since this situation is impacting the entire real estate industry, there are a lot of potential routes you can take to regain financial stability. When you gather information, seek out the advice of experts, and use the resources available to you, it’s easier to find your footing once again.
