Mortgage Payment Deferrals
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In recent months, the COVID-19 pandemic has put a lot of extra stress on homeowners across the world, especially in the major areas of Canada, where the average cost of a mortgage can be considerable. Since many of these homeowners have lost their employment or had their income reduced following the country-wide quarantine, they are now looking to defer their mortgage payments until their financial situation improves.
That said, the coronavirus outbreak isn’t the only reason why a homeowner might want to defer their mortgage payments. Keep reading to learn more about mortgage payment deferrals in Canada and whether they are the right option for you.
What Happens When You Defer a Mortgage Payment?
Simply put, a mortgage deferral or mortgage forbearance is when you strike an agreement with your lender that, when accepted, allows you to temporarily delay your payments for a specific period. Although this isn’t an option everyone can or should take advantage of, many homeowners will request it for various reasons, such as unemployment or, in this case, the inability to work during a pandemic.
In fact, a number of mortgage lenders, including our five big banks (RBC, TD, BMO, CIBC, BNS), as well as private home insurance providers like Genworth Canada are now offering special deferral programs to help their clients through the crisis.
What To Watch Out For When Deferring a Mortgage Payment
Although this type of agreement may sound good on paper, what many homeowners may not consider right away is that a deferral doesn’t mean your mortgage payments are cancelled. As mentioned, it just means they’re delayed for the time being.
Once your agreement ends, you must resume your payments and pay off any principal, interest, and fees that accumulated during the period of suspension. While you may be able to negotiate better terms with a new mortgage plan down the line, all these extra costs can largely increase the size of your payments, so it’s best to be careful going forward.
How Do You Defer a Mortgage Payment?
Thinking you might have to defer your mortgage payments? Then the first thing you should do is contact your lender to find out whether it’s truly an option and, if so, how it could impact your finances positively or negatively in the long run.
If your lender does offer this type of program, it will generally be on a case-by-case basis, meaning your mortgage will need to be reevaluated before they can actually approve you for a deferral agreement. During this evaluation, they may also examine various financial elements, such as your household income and credit history.
Mainly, this inspection is to determine how easy it would be to afford your larger mortgage payments once they resume. After all, you’ll still have the same balance remaining on your home. Depending on your lender, you may be able to extend your amortization period which may involve your mortgage having to be refinanced.
The Cost of Deferring a Mortgage Payment
Remember, the most important thing to understand about deferring your mortgage payments is that while you won’t have to pay them in the short term, they will be tacked on to your mortgage and interest still accrues. Here are some of the main costs you will encounter once you start making deferred payments again:
- Principal – Whatever amounts you defer will need to be factored into your new mortgage plan, which can lead to larger payments.
- Interest – The longer you defer your mortgage payments for, the more interest you’ll accumulate over time.
- Fees – Although the upcoming mortgage principal and interest will make up the largest portion of your debt, it’s still important to factor in whatever administrative costs could be associated with the deferral and refinancing processes.
Here’s an example of how much a deferred mortgage payment could cost you:
- Let’s say you have a 20-year amortization period left on your home and a $500,000 mortgage, with an interest rate of 3.00%. That would bring your average mortgage payment to somewhere around $2,770 per month.
- For whatever reason, you defer your mortgage payments for a 6-month period. This would effectively increase your monthly payment by about $100 and your new mortgage price by about $5,500.
Luckily, if you defer fewer payments and don’t have as many years remaining on your primary mortgage, you generally won’t be subject to as many additional costs. That said, if you don’t wish to take on larger payments, you’ll have to check if your lender will increase the length of your original amortization period,.
HELOC: An Alternative to Mortgage Payment Deferral
So, if you’re able to handle the extra financial commitment that comes with deferring your mortgage payments, it can be a good temporary solution, especially during COVID-19 and any other unexpected events that could affect your finances. However, you may not want to have larger payments or longer amortization. In that case, a home equity line of credit (HELOC) may be an alternative that’s worth looking into.
What is a HELOC?
Essentially, a HELOC is a revolving credit line that you can open once you have at least 20% equity, an asset that your home generates when you pay down your mortgage or increase the real estate value of your property. If you’re still in the middle of paying down your primary mortgage, the HELOC becomes your “second” mortgage.
Similar to a credit card, you can withdraw from your HELOC whenever you want, up until you reach a designated credit limit, and repay your outstanding balances on a monthly basis, with the option of making minimum or partial payments. You can then use your HELOC to cover your primary mortgage payments while your finances recover.
A home equity line of credit may be more suitable for your financial needs because:
- Your primary mortgage payments won’t change
- You can borrow in the amounts you wish, instead of having set payments
- You will only have to pay interest on the amounts you borrow
- Interest rates are often variable and may be cheaper overall
- If you wish, you can borrow from it for a much longer period of time
All this said, a HELOC may not be as good for your finances because:
- You may have two mortgage payments (if your first mortgage is ongoing)
- Two mortgages and longer payment periods can cost you more overall
- The approval process can be more expensive and complicated
So, if you’re looking for a temporary solution to your mortgage payments that doesn’t involve deferring them all together, a HELOC may be a solid alternative. That said, it can also be more expensive in the long term, so it’s a good idea to speak with your mortgage lender to learn all your options and get an estimation of the potential costs.
Do I have to repay my deferred mortgage payments?
Am I eligible for a mortgage deferral?
Will deferring my mortgage payments affect my credit score?
When is the best time to ask my lender for a mortgage payment deferral?
Considering a Mortgage Payment Deferral?
Whether you’d like to defer your mortgage payments due to COVID-19 or any other sort of crisis that has impacted your finances, the key is to get in front of the situation before you end up with a debt you can’t afford. Always contact your mortgage lender before you miss a payment, getting in front of any potential financial issues is the key to a healthy financial life.
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