Restarting Your Payments After a Deferral

As the COVID-19 pandemic swept through the world, mass business closures left much of the working class unable to make their regular loan payments. Though there was financial assistance made available through the government, there were many who did not qualify. Additionally, many who were eligible for either employment insurance or CERB payments, still found themselves unable to meet their standard loan payments. As a result, many households and individuals opted to defer their debt payments when possible. 

According to the Canadian Bankers Association, approximately 15% of mortgage loans were in a deferral state as of May 2020. Though this temporary reprieve helped many get through the coronavirus crisis, deferral arrangements are now coming to an end. This leaves many wondering what happens next in terms of their financial wellbeing and future. 

Restarting Payments After a Deferral

When your deferral arrangements come to a close, it’s important to be informed as to how this will impact your overall loan. 

How Payments Are Deferred

When you defer payments, you are able to skip over expected payments for a set amount of time. In many cases, this can extend up to half a year. However, the interest keeps accruing on the amount owing during this period. Additionally, though deferrals enable you to skip payments for a time, these amounts remain owing. Many mortgages have deferral clauses to prevent issues like defaults. Most major banks expanded these rules to prevent mass foreclosures during the pandemic. Now that this deferral period is ending, it is critical to have a structured approach to paying both your regular payments and the deferred amount. 

Repayment Terms For Deferrals 

While each financial institution and arrangement has different specific terms, most loan types have similar approaches to handling the payments of deferred amounts. These include:

Mortgages: Loans for homes have a few different approaches to managing deferrals. Ensure that you follow the terms set forth in your deferral agreement to prevent issues. Generally speaking, the deferred payments will be added to the overall mortgage amount, resulting in a higher amount paid by the time the loan is discharged. This would extend the amortization period of the loan. 

Another scenario includes dividing the deferral amount across the current amortization period. This scenario would increase your regular payment amounts. If you were able to accrue sufficient funds to pay the entire amount owing, ensure that you discuss this prior to paying the amount to be certain that there are no associated penalties. 

Loans: Generally, loans are structured in a similar manner to a mortgage. However, depending on the structure of your loan arrangement, you can discuss alternative arrangements with your lending institution. This may include an increased frequency in payments. Typically, the unpaid amounts and interest will be distributed across the overall loan, letting you discharge it at the same time while paying higher amounts. If you are unable to pay these amounts, discuss extending the loan term with your lender.

Lines of credit: If your lender enabled you to pay only interest for the deferral period, you will still need to pay the deferred payments. Should your line of credit be over the lending limit, this is the first matter to address. Once this is paid down, you can discuss payment arrangements similar to those with a loan. This will increase your monthly payment amount to address the skipped amounts. Be certain that you are acting within the parameters of your line of credit agreement. If in doubt, consult your paperwork or speak directly to the lending institution. 

Credit cards:  Another very common financial arrangement during the pandemic was deferring credit card debt. Some credit card companies and arrangements will take the amount deferred, divide it relative to the deferral length, then add this to your monthly payments. Others are offering a decreased interest rate on your existing credit balance, then crediting the bill after the period of deferral. To avoid any unforeseen amounts owing and obtain a specific budget, familiarize yourself with repayment terms.  

Utility bills: The standard approach to paying out the deferral amount for utilities include adding a proportionate amount to your regular utility payments. This means that the total amount deferred is divided across the length of the deferral. This amount is then added to your monthly payments. If you want specific details, consult the terms of your arrangement with the utility company itself. 

Preparing To Restart Your Payments

While it might seem overwhelming to approach repaying your deferred amounts on top of your regular payments, there are some simple steps you can take to manage the situation. By creating a detailed plan, you can prudently approach your debt situation in a favourable manner. 

Assess Your Current Financial Situation

Gaining an honest picture of your finances is the first step in creating a plan for success. By knowing exactly what you are dealing with, you can plan for the future in a realistic manner. These steps include: 

• Analyzing and adjusting your budget: A detailed budget is more than just money in and money out; it is a comprehensive plan for how to spend the money you earn. Include your job, any side hustles, tips,  investments, and interest accruing on your savings. Create a complete list of the amounts you owe to all of your loans. Ensure that you factor in the increased payment amounts for any loan deferrals coming to an end. Assess your monthly spending in a realistic manner. Detail what you spend on food, entertainment, your vehicle, medication, and any other routine expenses you incur.  
• Cut back spending: Now that you have an accurate picture of what you earn and spend, you can take a real look at places you can cut costs. Living frugally is a proven approach to tackling built-up debt. Consider places where you can reduce your expenses. Perhaps you spend too much on food? Is there a way to streamline your cell phone or internet plan? Maybe your entertainment budget can be reduced. Identify the places where you can spend less and set yourself a maximum spending amount for those areas. 

Prioritize Debts

The next step is to assess the debts you have and figure out where to place the amount you saved by cutting back on your spending. 

• Identify high-cost debts: Revolving debt like credit cards tends to have a high rate of interest, particularly when viewed relative to other loans. If you have multiple credit cards, figure out which one is costing more in interest each month. Without neglecting your regular payments on other amounts, focus on paying down the more expensive debt in your name. Because the actual interest amount is relative to the amount owing, ensure that you reassess your math quarterly. Continually pay down the most expensive debt first and you will save in the long run. 

Monitor Your Credit Score

Future creditors look at your credit score and so should you. It is also important to ensure the overall accuracy of your credit report. Credit scores are assessed considering a large number of criteria; and, though this pandemic poses a unique situation, some things remain true. These include:

• High debt post-deferral: One factor future lenders will look at is the amount of debt post-deferral. The best way to address this is to promptly address the amounts owing. Ensure that you meet your regular payments, even if they are adjusted to a higher amount. A higher amount of debt does negatively impact your credit score, so taking steps to reduce your amount owing is prudent. 

• How deferrals will look to future creditors: While it remains to be seen how future lenders will interpret a deferral for future loans, it does show that you encountered financial challenges. This does not necessarily mean you will be denied or receive a higher amount of interest, but it does give insight into the bigger picture of your financial landscape.

What If You Can’t Afford to Restart Your Payments?

In the event that you find yourself unable to start back up with your payments, there are some steps you can take. These include:

• Reach out to your creditors: In situations where you can partially pay your regular amounts, discuss with your creditors the possibility of an individualized payment arrangement. Especially if you take action early, creditors may be able to make small adjustments to help you maintain regular payment in smaller amounts. 
• Considering if your car is worth it: If your car loan is creating a struggle financially, consider surrendering it to rid yourself of the loan. If the car is yours free and clear, selling it can provide you with immediate funds to put towards debt? It will also save you on insurance and maintenance costs. 
• Consumer Proposal: As a matter of last resort, if your debt doesn’t exceed $250,000, consider speaking to a Licensed Insolvency Trustee to discuss the possibility of a consumer proposal. This step, while drastic, can assist with managing large amounts of debt for which there is no other appropriate payment method. 

Final Thoughts

When it comes to debt, there are always options. Once you gain a thorough understanding of how to manage your post-deferral debt, you can take the necessary steps to protect your finances. Though deferrals were common during the pandemic, it is the onus of the individual to handle post-deferral finances responsibly. By staying organized, crafting a quality budget, and paying the amounts you owe, you can ensure a solid financial future.