Since the beginning of the COVID-19 pandemic lock-down in March, 2020, about 760,000 Canadian homeowners have taken advantage of the mortgage deferral options. As we rapidly approach the end of the payment deferral period, what now? Homeowners are scrambling for answers.
By the end of March, Canada’s six largest banks (CIBC, RBC, TD, Scotia Bank, BMO and National Bank) offered their borrowers the ability to defer up to 6 months of mortgage payments. Other financial institutions jumped on the bandwagon to help their borrowers with mortgage, credit card, and car loan payments.
According to TransUnion Canada, around 2.6 million Canadians have at least one active deferral.
It is no wonder that the big question of “now what?” looms over Canadians as fall approaches.
Mortgage Deferral Payment Period Is Over – Now What?
Several banks have provided some guidance as to what happens next. For example, according to the TD website:
“When things do get “back to normal,” remember that the total amount owing on your mortgage will be higher, due to the interest that has accumulated. As a result, you’ll pay more interest in the long run. In that case, you might wonder how your payments may be handled. In the case of TD, your payments will be adjusted automatically at the start of your next term or, if you change anything else before renewal, at that time, to ensure your mortgage is paid off at the end of your original amortization period.”
Seems fairly straight forward, right? But what if things have not returned “back to normal”? What if your job situation has not improved, or your business revenue has continued to suffer due to COVID-19? We’ll address those concerns further below.
First, there’s a bigger issue which most Canadians have likely not thought about. I’m referring to the language used by some banks to describe the consequence of mortgage deferral payments. It may be down-playing the true cost and effect of the mortgage deferrals. Consider the following:
The Cost of Deferring Payments
The skipped, or “deferred interest”, is added to the principal balance of your mortgage. As a consequence, it will increase your interest costs over the life of your mortgage. RBC has a nifty calculator to determine how it will impact your particular case (source).
For example, let’s assume your mortgage payment is $3,000 a month, and your remaining amortization period is 20 years. Let’s assume you currently pay 3% interest rate. According to the calculator, deferring 6 months will cost an (astonishing!) additional $13,807 over the remaining amortization period!
Still not astonishing enough? We need to put things into proper perspective. This calculation does not include other factors, such as rising interest rates rising over the next 20 years, which is almost inevitable. The 3% used in the calculation above is your CURRENT interest rate.
Also note that financial advisors, financial planners and insurance agents are required to use historical data for illustrations. This is help project “more realistic” interest rates. This is also to protect you, the consumer. History has taught us that we cannot ignore large changes in rates.
Hence, let’s take the historical average. The Bank Lending Rate in Canada averaged 7.20 percent from 1960 until 2020 (source). That’s a more reasonable average rate to include in the calculator provided. If we use 7.2% the interest owing increases drastically!
Using the average rate of 7.2%, here is the new calculation. Assume the same monthly payment of $3,000, remaining amortization of 20 years, but now 7.2% interest. Now, deferring 6 months will cost you an additional (and whopping!) $52,020!
What If I Can’t Make My Payments?
When it comes to dealing with a mortgage deferral, some lenders have said they’ll work on a case-by-case basis with borrowers. This is especially true for those who can’t resume regular payments.
Other news feeds have reported borrowers consider a consumer proposal. What’s the rationale for a consumer proposal? It follows that borrowers can reduce their non-mortgage debt and keep their home. This is true as long as they’re able to keep up with mortgage payments. However, this may not be the best advice. Homeowners would have to consider the serious ramifications a consumer proposal can have on their credit bureau.
Borrowers should consider all possibilities and especially on how it will either impact or preserve your credit. After all, you work hard to build a good credit score!
What About Refinancing?
Unfortunately, and ironically, banks are reluctant to lend money when you need it the most. Banks won’t refinance mortgages in distress, especially if a reduction or loss of income is the issue. The reason being is that a lowered income can substantially impact your GDS/TDS ratios. The banks have become very strict due to COVID-19 and must adhere to rigid lending rules.
Can I Borrow From A Line Of Credit?
Borrowing from a Line of Credit (unsecured LOC) or Home Equity Line of Credit (HELOC) can be a viable option for a band-aid solution. The problem is that you need to have had an account opened before your situation worsened. In order to determine if you qualify today for a HELOC or LOC, consider all aspects of your current financial situation. For example, your current income, credit, and equity in your home. For instance, applying for a HELOC requires a very similar process and underwriting criteria as applying for a mortgage. If you believe you can qualify, contact us, and we’ll help you calculate the figures.
Second Mortgage A Possible Solution
Many Canadian homeowners dread these words: second mortgage. There’s an old stigma about it. Call it a Home Equity loan, Second Mortgage, Private Mortgage, they are all the same thing. Simply put, it’s a mortgage that ranks behind your bank mortgage. In other words, it is in “second place”. It is a mortgage that is secured by the equity you have in your home. So naturally, because it carries a higher risk to the lender, the rates tend to be higher than the banks.
Despite the “old stigma”, second mortgages do serve a valuable purpose. It also fills a need that banks cannot serve. In fact, alternative and private lenders hold approximately $14 billion of outstanding Canadian mortgages. Data from CMHC also suggests that figure will continue to grow in 2020.
If you have exhausted your search through the banks, then a second mortgage may be an option. And if you haven’t, contact us and we can help you search over 50 banks and institutions.
The benefits are many. A customized solution can help you cope over the next few months, even up to a year. You can potentially request enough to cover the next 12 months of your bank mortgage payments. Perhaps you can even cover the payments on the second mortgage. That could provide a huge relief to homeowners.
There are fewer requirements or rules, so getting approved is much easier. There is less consideration, if any, of your current income or credit. The main qualifier is the equity in your home. If you have more than 15-20% equity in your home, you may be in good shape. To clarify, the equity is the value of your home less any mortgage balances. For example, if your home is worth $1m in Toronto, and your bank mortgage is $750,000, then your home equity is $250,000.
Borrowers are encouraged not to delay dealing with their bank mortgage deferral. Now is the time to act and determine the right course of action. Contact us anytime to help you navigate through your options.