If you are struggling with finances right now, a COVID-19 mortgage deferral plan may play a critical role in keeping your family afloat. The COVID-19 pandemic is causing a lot of financial distress for Canadians. Many businesses have had to shut their doors. Many workers have lost their jobs due to COVID-19.
That means there is a lot less money coming to pay the bills, including mortgages. But mortgages still have to be paid. The question is, how do you still pay your mortgage if your income has been cut down?
To help people in need, a mortgage deferral may be done. This can help cut down on bill payments to help Canadians who are having trouble keeping up with their home loan payments.
The Big Six banks in Canada are allowing mortgage payment deferrals to clients who have seen their incomes interrupted. Many smaller lenders are also offering mortgage deferrals.
What is Mortgage Deferral?
Many mortgage contracts already have deferral options in them, even before COVID-19. A mortgage deferral means that mortgage payments can be pushed out. That way, payments do not have to be made for a temporary amount of time.
The Big Six banks are allowing borrowers to defer their mortgage payments for up to six months. This applies to borrowers in “good standing.” That means they must have a good record of paying their bills on time.
The banks that are involved in mortgage deferrals include:
- RBC
- TD Bank
- BMO
- CIBC
- Scotiabank
- National Bank of Canada
All banks are different. But the general way that mortgage deferrals work is by postponing payments for a temporary deferral period. Then, they will spread the interest out over future payments.
They might even add on some payments at the back-end of the mortgage. Each situation and client is different. Lenders will look at different scenarios on a case-by-case basis.
Mortgage deferral just means that you don’t have to pay the principal portion for now. The interest payment is deferred until a future time.
Homeowners should check with their bank or lender before deferring their mortgage. Lender deferment options should be looked into to see if they are available.
Mortgage deferral is not just for homeowners, but also for landlords. There are many people in Canada who own property that they rent out. But renters may not be able to pay their rent because of lost income from COVID-19.
Tenants may not have to pay their rent during this time, But that still leaves landlords left to cover their mortgages without rent to help out. In this case, mortgage deferral might help.
The Cost of Mortgage Deferral
It’s important to know that mortgage deferral doesn’t mean forgiveness of payment. Those skipped payments will still need to be paid back at some point. Canadians will have to catch up on those deferred payments.
Homeowners should also understand the cost of mortgage deferral. The lender will still charge interest. Interest will still continue to accrue on their mortgages.
Even though you are not paying your mortgage for a few months, that interest will still add up. That means the interest will still be added to the outstanding balance.
So, you could be paying more in interest costs over the life of your mortgage, even after your regular payments resume.
Will Mortgage Deferral Hurt Your Credit Score?
Your credit score is an important part of your financial profile. You need a healthy credit score to get approved for loans, including mortgages. You need a good credit score to get low-interest rates, too.
A healthy credit score is important for other aspects of life, in addition to loans. It helps when applying for a job, getting an apartment, and even signing a contract for a cell phone.
That’s why a good credit score is so important. But certain things can make your credit score go down, including not paying your bills.
So, will a mortgage deferral hurt your credit score? Since you’re not paying your mortgage for a certain amount of time, will your credit score suffer?
Generally, missing loan payments would be bad for your credit score. But if your lender says it’s OK to push your payments out, you should be fine.
However, it’s important that your lender does not report missed mortgage payments to the credit bureaus. If that happens, your credit score can suffer. For this reason, you should check your credit regularly.
Checking your credit report is essential because your credit score could still be affected. A deferred payment can show up as a late payment on your credit report.
The credit reporting agencies don’t qualify for the data they get. The important thing is how lenders report deferred mortgage payments.
That’s why it’s so important that you make sure that your lender does not report your deferred payments as missed. That’s also why it’s so important that you check your credit report.
Your Continued Obligations
People who defer their monthly mortgage payments should know that they still have to keep up with other payments. For example, you will still have to pay all your utility bills. You will also have to continue paying your property taxes, property insurance, and other bills needed to run your home.
Other Options to Help Financially
A COVID-19 mortgage deferral may be a great help to many Canadian homeowners. But there are other options that you may want to look into.
Skip-a payment
Canadian homeowners are also using skip-a-payment options that they are allowed on their mortgage contracts. This allows them to skip one payment a year.
This can be helpful when income is low on any given month. But like mortgage deferral, your interest will still accrue. Plus, you will still have to make up that skipped payment, plus interest.
Home equity line of credit (HELOC)
You might be able to use money from your home equity if money is tight. The “loan” is secured by your house. These programs usually come with good interest and repayment terms.
With this option, you can withdraw as much money as you need up to a credit limit. You only have to pay interest on the amount you withdraw. Then you can repay that amount and reborrow from it in the future.
The money can be used to pay for any expenses you might have. It’s a good short-term option to look into if you are short on money because of COVID-19.
Extend your amortization
Your amortization is the total amount of time that you have to repay your mortgage principal and interest. This is not the same as the mortgage term, which is the amount of time you are locked in a contract with your lender.
There are short-term and long-term amortization periods. Short-time amortization periods mean your mortgage would be paid off sooner. But to do that, your mortgage payments will be higher.
Long-term amortization periods mean that you have a lot longer to pay off your mortgage. That means your mortgage payments will be smaller. But you will pay more interest overall.
If you increase the length of your amortization period, you can lower your monthly payments. This can be good if your mortgage is mostly paid off. It’s also a good idea if you only have a few years left to repay your mortgage.
Employment insurance (EI)
If you are an employed worker, you may be eligible for employment insurance (EI). You may need to prove that you are unable to work because of COVID-19 in order to qualify,
You will also have to show that you worked in insurable employment. Also, you need to have worked a certain number of insurable employment hours over the last 52 weeks.
Canada Emergency Response Benefit (CERB)
For people who might not be getting EI because they are self-employed or are freelancers, CERB may be available. This benefit is for those who have stopped working because of COVID-19.
It provides temporary income. People who apply and are qualified can get $500 a week for up to 16 weeks. But you cannot apply for both EI and CERB. Only one or the other.
Canada Emergency Business Account (CEBA)
This benefit is for businesses that have lost a lot of revenue due to COVID-19. This benefit provides interest-free loans for up to $40,000. This is for small businesses and non-profits to help cover operating costs.
Businesses will have to show that they paid $20,000 to $1.5 million in payroll in 2019 to qualify. They can apply through their banks and credit unions.
As you can see, there are many programs available to help financially. If you lost your income because of COVID-19, you might want to apply to any one of these programs. They can help you pay your bills which won’t stop because of the pandemic.
Conclusion
The COVID-19 pandemic is hurting Canadians. Not only is it affecting the health of many, but it is also hurting people financially.
Business cash flow and household incomes are decreasing or perishing every day. This is making it tough to pay bills, including mortgages.
But thankfully, a COVID-19 mortgage deferral can help qualifying families. This includes mortgage deferral options. If you are having trouble paying your mortgage, you might want to call your lender. You can then ask if deferring your mortgage is possible.
If so, you can get some temporary financial relief.
