If you’ve been required to go into self-isolation, are out of work or have lost hours at work due to illness or child-care responsibilities you may be worried about whether you will be able to pay your mortgage.
What’s the mortgage industry doing?
Friday March 27th: The Bank of Canada announced a cut to the target overnight rate of 0.5% and is holding that rate as of April 15th. After a scheduled cut on March 4th, and an unscheduled cut on March 14th, this was the third cut in March. That left the target for the overnight rate at 0.25%.
As of April 15th, prime rates are currently at 2.45%.
Wednesday March 18th: six of Canada’s largest banks announced they would be allowing mortgage payment deferrals of up to six months. These included CIBC, RBC, BMO, TD, Scotiabank, and National Bank. Many smaller mortgage providers have also followed suit.
What are your options?
First determine if a mortgage deferral is a need vs. panic; is it the best option for your situation.
According to CMHC, a deferral is an agreement between you and your lender (your bank or your mortgage professional) indicating that you have agreed to pause or suspend your mortgage payments for a certain amount of time.
Many mortgage lenders offer a built-in feature that allows you to skip-a-payment, this provides immediate relief for up to one month. For longer periods, the current financial relief programs offer up to six months. In either case, do the math to understand how much the deferral will actually cost you.
Most notably, you will have to make the deferred payment(s) at some point and interest is still accumulating. As well, interest is accumulating on top of other interest, so you could end up paying quite a bit more over the remainder of the mortgage.
Here’s how RBC explains the process on their site:
“There is no fee to skip a payment. When you skip a payment, the interest on the skipped payment is added to your outstanding balance and interest is charged on that amount. This means your mortgage balance will increase. Your payments won’t change during the term of your mortgage. Instead, at renewal your monthly payment amount increases to account for the higher balance.”
For example, using RBC’s Skip-a-payment Calculator
- INTEREST RATE: 2.80%
- REMAINING AMORTIZATION: 20 YEARS
- MONTHLY PAYMENT: $2,200
- COST OVER THE LONG TERM TO SKIP ONE MONTH: $1,543.57
- COST OVER THE LONG TERM TO SKIP SIX MONTHS: $9,261.42
An example provided by CIBC illustrates this well. A client with a mortgage with an original principal balance of $100,000 amortized over 25 years at a 3% interest rate has a monthly payment of $473.25. If the client then defers the next six monthly payments, the interest portion of those payments will be added to the principal balance of $85,474.30, resulting in a new principal balance of $86,738.71. Because the new principal balance has now increased, the monthly mortgage payments will increase, too, to $489.26.
How much you’ll pay will depend on how much of a loan you have left, how many months you defer and how many years you have remaining on your amortization.
Protecting Your Credit Score
In normal times, your credit score could take a hit if you’re delinquent with a payment. The expectation now is that mortgage deferral options come with the guarantee that lenders will not register a missed or late payment which would negatively impact your credit score.
No one knows for sure if all the deferred payments will be reported correctly or not. Lenders will need to take actions on its system to ensure that it does not report any derogatory/missed payment information to the credit bureaus that is misaligned with the program it has implemented.
If you decide to defer your mortgage payment always get it in writing. Ask for the employee number or service rep’s name that confirmed your deferred payment. And remember to record the date and time the conversation took place. Should a deferred payment mistakenly be recorded on your credit report you’ll need written proof of the lender’s commitment to dispute it. Errors happen quite frequently on credit reports so it’s wise to take a proactive approach and monitor your credit rating. Equifax is currently offering Canadians a free online credit report during the crisis.
Most important, the time to apply for a deferral is before you miss a mortgage payment. If you think you’ll be unable to make an upcoming mortgage payment, the first thing to do is reach out to your lender before you miss the payment.
According to The Financial Post, as of April 3rd, over 500,000 requests for mortgage deferral had been processed or completed. Remember that every contact centre in the world is currently inundated, so please be patient. This list provides some direct contact numbers for various lenders across the country.