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.
Glossary
| TERM | DEFINITION |
|---|---|
| Appraisal | An appraisal involves assessing the value of a property based on current market values and is conducted by an appraiser that is typically assigned by a lender. The appraisal is then used by the lender to determine whether or not to extend a mortgage to a borrower. |
| Bridge Loan | A bridge loan is a type of short-term loan that may be used to “bridge” the gap between carrying a mortgage on an existing home and covering the mortgage for a new home. These are usually obtained when the closing dates of a home sale and purchase overlap, requiring the seller to continue paying the mortgage on the existing home before it closes while paying the mortgage on a new home. |
| Canadian Housing and Mortgage Corporation (CMHC) | A governing body in Canada that oversees and executes several federal housing projects in relation to the National Housing Act. |
| Cash-Back Mortgage | A cash-back mortgage allows borrowers to obtain the mortgage principal and a percentage of the loan amount in cash, which can come in handy to cover the cost of certain expenses, such as making home improvements or paying for car repairs. Rates on these types of mortgages tend to be higher compared to other home loans. |
| Closed Mortgage | A closed mortgage allows borrowers to prepay only a certain amount of the principal without being charged a prepayment penalty fee. Fixed-rate closed mortgage prepayment penalties are usually 3-months’ worth of interest or the interest rate differential, whichever of the two is greater. |
| Closing Costs | Before a real estate transaction closes, certain closing costs will need to be paid, which can include real estate commissions, lawyer fees, land transfer taxes, appraisal fees, home inspection fees, adjustments, and others. |
| Conditional Offer | A conditional offer is not yet final and means that there are certain conditions that must be fulfilled by the buyer, seller, or both before the sale is considered “firm.” For instance, an offer could be conditional on the home being inspected, which the buyer must be satisfied with. |
| Construction Mortgage | A construction mortgage allows borrowers to finance the cost of construction of a new home or major renovations. |
| Debt Ratio | Your debt ratio determines your ability to pay off a mortgage by measuring your debt relative to your income. Lenders look at debt ratios to assess a borrower’s ability to make mortgage payments. A high debt ratio means your debt load is too high relative to your income. Gross debt service ratio refers to your debt that does not include a mortgage payment, and total debt service ratio refers to your total debt including mortgage payments. |
| Deed | A deed is a document signed by the seller that transfers ownership from the seller to the buyer. |
| Down Payment | A down payment is the money that is put toward the purchase price of a home. The required down payment will depend on a number of things, such as the type of mortgage being taken out and the cost of the house. |
| TERM | DEFINITION |
|---|---|
| Firm Offer | An offer goes “firm” after all conditions have been satisfied and signed off by all parties. A sale can also be immediately firm if no conditions are included. |
| Fixed-Rate Mortgage | A fixed-rate mortgage means that the interest rate does not change throughout the entire mortgage term. Even if posted interest rates go up or down during the term, your rate will be locked in and stay the same until the term ends. |
| Foreclosure | Foreclosure is an unfortunate situation in which a homeowner loses possession of the title of their home as a result of mortgage payment defaults. When mortgage payments are missed, the foreclosure process may begin after a certain number of days have passed. In this case, the lender can take over the home under a “power of sale,” after which the homeowner may still have a chance to make good on their mortgage payments and bring their debt up to par. Otherwise, the lender may make efforts to sell the property to recover any money they are owed. |
| Gross Debt Service Ratio | A gross debt service ratio is the measure of housing-related debt relative to a borrower’s income. GDSR is a factor that lenders consider when determining whether or not to approve a mortgage application. |
| High-Ratio Mortgage | A high-ratio mortgage refers to a mortgage in which the principal is greater than 80% of the property’s value. That means more than 80% of the home’s value must be borrowed in order to buy a home, while the down payment is less than 20% of the property value. High-ratio mortgages require mortgage default insurance to be paid. |
| Home Buyers’ Plan (HBP) | The First-Time Home Buyers’ Plan (HBP) is a government incentive program that allows first-time homebuyers to withdraw up to $25,000 from their Registered Retirement Savings Plan (RRSP) – or $50,000 in total for first-time home buyers and their partner – to buy or build a home. The full amount withdrawn must be repaid within 15 years. |
| Home Equity | The equity in a home represents the value of the property, less total outstanding debt, that the owner actually owns outright. It is calculated by subtracting the total mortgage loan amount still owed by the property’s value. |
| Home Equity Line of Credit (HELOC) | Using the equity in your home, you can secure a line of credit that uses the equity as collateral. The credit limit is usually equivalent to a particular percentage of your home’s value and there is a set date when the loan must be repaid. If you default on this kind of loan, the lender can repossess your home and sell it to cover the owed debt. Since there is a high risk with this type of financing, it is typically used to finance big purchases such as home improvements, education, or medical expenses. |
| Home Inspection | Many conditions can be inserted into a purchase agreement, including a home inspection. The home inspection allows buyers some time to have the property assessed by a professional to uncover any potential issues with the home before the buyer is obligated to complete the purchase. |
| TERM | DEFINITION |
|---|---|
| Interest | Interest is added to the principal amount of the mortgage and is paid to the lender in exchange for access to the funds needed to complete a real estate purchase. Interest is charged from the moment the money is received to the moment the term expires. |
| Land Transfer Tax | Land transfer taxes are charged by the province in which the property is being purchased, as well as in certain municipalities. It is a type of tax that is based on the purchase price of the property, though these taxes vary by province. First-time homebuyers are sometimes exempt from paying the entire land transfer tax amount and may be eligible for a rebate. |
| TERM | DEFINITION |
|---|---|
| Maturity Date | The maturity date is the date when the mortgage term ends. It is at this point that the mortgage must either be paid in full, refinanced, or renewed for a new term. |
| Mortgage | A mortgage is a loan that is provided by a lender to help a homebuyer complete a home purchase. Lenders provide a certain amount of money required to cover the cost of a home’s purchase price while charging interest on the principal amount. The loan is collateralized by the property itself. The mortgage must be repaid according to the terms of the contract. If the loan amount cannot be repaid according to the terms, the lender has the right to repossess the property and sell it to recoup any losses. |
| Mortgage Broker | A mortgage broker is a professional who works on behalf of the borrower and finds the best mortgage product and lender among their network of lenders. |
| Mortgage Default Insurance | Mortgage default insurance is designed to protect the lenders when a borrower is unable or unwilling to repay their mortgage. This is applicable to high-ratio mortgages where the down payment amount is less than 20% of the purchase price of the property and does not apply to conventional mortgages. Borrowers are responsible for this payment. |
| Mortgage Discharge | A mortgage discharge is issued by the lender when the mortgage is paid off in full by the borrower. When the mortgage is fully repaid, it is discharged from the title to the property and certifies that the property is completely free from the mortgage debt |
| Mortgage Life Insurance | Mortgage life insurance is an optional policy that borrowers may take out. It is designed to reduce or pay off the mortgage amount (up to a certain amount) in the event of the borrower’s death. |
| Mortgage Payment | A mortgage payment is the regular payment borrowers are required to make to pay off their home loan. These payments can be made monthly, semi-monthly, biweekly, or weekly, and include both principal and interest. |
| Mortgage Pre-Approval | A mortgage pre-approval involves having your credit and finances checked out before you formally apply for a mortgage once you agree to purchase a particular home. It allows you to find out how much can be afforded, how much the lender is willing to lend, and the interest rate that may be charged. Pre-approvals expire within 90 to 120 days after they are issued and are not a guarantee of final mortgage approval. |
| Mortgage Principal | The mortgage principal represents the amount of money borrowed from a lender and does not include the interest portion. |
| Mortgage Statement | Lenders typically submit a mortgage statement to borrowers on a yearly basis that details the status of the mortgage, including how much has been paid and the principal on the mortgage that still remains. |
| Mortgagee | The mortgagee is a mortgage lender. |
| Mortgagor | The mortgagor is the borrower. |
| Multiple Listing Service (MLS) | The Multiple Listing Service (MLS) is a database of listings where real estate professionals market properties they have for sale and search for properties for sale for their clients. |
| Offer | The offer represents the purchase agreement that the buyer submits to the seller and that the seller can either accept, reject, or negotiate with the buyer. The offer includes the offer price, deposit amount, closing date, conditions, and other items pertinent to the transaction. |
| Open Mortgage | An open mortgage allows borrowers to repay their loan amount in part or in full without incurring any prepayment penalty fees. Open mortgages tend to have higher interest rates compared to closed mortgages but are more flexible. |
| Posted Rate | The posted rate is the lender’s benchmark advertised interest rate for mortgage products offered. These are not necessarily set in stone, but may be negotiated with the lender. |
| Prepayment | Prepayment is made when some or all of the loan amount is paid off before the end of the mortgage term. Most open mortgages can be paid off early without any prepayment penalty charges, but prepaying a closed mortgage typically comes with a prepayment charge. However, most closed mortgages allow an annual prepayment of anywhere between 10% to 20% without any penalty. |
| Prepayment Charge | When all or part of a closed mortgage is paid off before the end of the mortgage term, a prepayment charge may have to be paid to the lender. |
| Prime Rate | The prime rate advertised by a lender is typically based on the Bank of Canada’s interest rate that is set each night, which may change at any time. |
| Property Insurance | Property insurance must be paid on a home throughout the mortgage term. Lenders require a policy to be held on a property before they agree to extend a mortgage, and the lender must be named on the policy. This type of insurance covers the cost of any repair or replacement as a result of damage to the home from fire or other disasters. |
| Property Tax | Property taxes are paid by homeowners to their respective municipalities to cover the cost of things such as police, garbage collection, policing, schools, and fire protection. The property tax amount paid is based on the property’s value and the rate charged by the municipality. |
| TERM | DEFINITION |
|---|---|
| Qualifying Rate | A qualifying rate is the interest rate that a lender uses to assess a borrower’s eligibility for a mortgage and to calculate your debt-service ratio. |
| Renewal | When the term of a mortgage expires, another term may be negotiated with the lender. If the mortgage is not renewed, it must be paid off in full. |
| Reverse Mortgage | Homeowners over the age of 55 can use a reverse mortgage to borrow as much as 50% of the home’s value to be used to pay for other expenses. Payments are not made on a reverse mortgage, but interest can accrue on the loan amount until the property is sold or until the homeowner passes away. |
| Second Mortgage | A second mortgage may be taken out on a home that already has a mortgage on it. The funds accessed through a second mortgage from the home’s growing equity may be used to cover other expenses, such as home renovations, but they carry more risk than first mortgages. |
| Statement of Adjustments | The statement of adjustments outlines the purchase price, deposit, and any financial adjustments that are required for taxes, utilities, or condo fees that have been prepaid by the seller and payable by the buyer to compensate the seller for fees already covered on the home. |
| Survey | A survey is a plan of the property’s lot that shows the lot size and where the property boundaries and building structures lie. It will also show where any easements, right-of-ways, or overhanging structures from adjacent properties that could impact the value of the home. |
| Term | The mortgage term is the period of time that you are committed to your mortgage with your lender, including the interest rate. When the term expires, the mortgage either needs to be paid off in full, refinanced, or renewed, either with the same lender or a new one. The average term is 5 years, though it can range anywhere from 1 to 10 years. |
| Title | Title is the ownership provided to a homeowner when a property is purchased. A clear title is required by lenders before a mortgage is extended. If there are any issues with the property’s title, they must be resolved before the transaction closes. |
| Title Insurance | Title insurance is meant to protect lenders and buyers from issues on the title that are discovered after the transaction closes. Title issues can include title fraud, encroachments, municipal work orders, or zoning violations. If title insurance is purchased, it will be added to the closing costs. |
| Total Debt Service Ratio | The total debt service ratio refers to the percentage of gross annual income needed to cover all debts in addition to the mortgage payments (including principal, interest, taxes, utilities, and more). |
| TERM | DEFINITION |
|---|---|
| Variable-Rate Mortgage | With a variable-rate mortgage, the interest rate will fluctuate based on a financial index. Monthly payments could remain the same, but the amount paid toward interest versus principal could change. If rates increase, more money is paid toward interest, but if rates decrease, more money goes toward the principal. |
