Ultra low mortgage rates, offered through various internet sites, are often restricted mortgages. You may have higher prepayment penalties than generally available in the marketplace, as high as 3% of your mortgage balance. Low rate mortgages often do not allow an in-term transfer, which is generally referred to as porting the mortgage with you to a new home. Many do not allow blend and increases (refinances), you must pay the penalty to do a refinance (get equity out of your home).
Month: April 2020
Bank of Canada Maintains Overnight Rate Target and Unveils New Market Operations
The Bank of Canada today maintained its target for the overnight rate at 1/4 percent, which the Bank considers its effective lower bound. The Bank Rate is correspondingly 1/2 percent and the deposit rate is 1/4 percent. The Bank also announced new measures to provide additional support to Canada’s financial system.
The necessary efforts to contain the COVID-19 pandemic have caused a sudden and deep contraction in economic activity and employment worldwide. In financial markets, this has driven a flight to safety and a sharp repricing of a wide range of assets. It has also pushed down prices for commodities, especially oil. In this environment, the Canadian dollar has depreciated since January, although by less than many other currencies. The sudden halt in global activity will be followed by regional recoveries at different times, depending on the duration and severity of the outbreak in each region. This means that the global economic recovery, when it comes, could be protracted and uneven.
The Canadian economy was in a solid position ahead of the COVID-19 outbreak, but has since been hit by widespread shutdowns and lower oil prices. One early measure of the extent of the damage was an unprecedented drop in employment in March, with more than one million jobs lost across Canada. Many more workers reported shorter hours, and by early April some six million Canadians had applied for the Canada Emergency Response Benefit.
The outlook is too uncertain at this point to provide a complete forecast. However, Bank analysis of alternative scenarios suggests the level of real activity was down 1-3 percent in the first quarter of 2020, and will be 15-30 percent lower in the second quarter than in fourth-quarter 2019. CPI inflation is expected to be close to 0 percent in the second quarter of 2020. This is primarily due to the transitory effects of lower gasoline prices.
The pandemic-driven contraction has prompted decisive policy action to support individuals and businesses and to lay the foundation for economic recovery once containment measures start to ease. Fiscal programs, designed to expand according to the magnitude of the shock, will help individuals and businesses weather this shutdown phase of the pandemic, and support incomes and confidence leading into the recovery. These programs have been complemented by actions taken by other federal agencies and provincial governments.
For its part, the Bank of Canada has taken measures to improve market function so that monetary policy actions have their intended effect on the economy. This helps ensure that households and businesses continue to have access to the credit they need to bridge this difficult time, and that lower interest rates find their way to ultimate borrowers. The Bank has lowered its target for the overnight rate 150 basis points over the last three weeks, to its effective lower bound. It has also conducted lending operations to financial institutions and asset purchases in core funding markets amounting to around $200 billion.
These actions have served to ease market dysfunction and help keep credit channels open, although they remain strained. The next challenge for markets will be managing increased demand for near-term financing by federal and provincial governments, and businesses and households. The situation calls for special actions by the central bank. To this end, the Bank is furthering its efforts with several important steps.
Under its previously-announced program, the Bank will continue to purchase at least $5 billion in Government of Canada securities per week in the secondary market, and will increase the level of purchases as required to maintain proper functioning of the government bond market. Also, the Bank is temporarily increasing the amount of Treasury Bills it acquires at auctions to up to 40 percent, effective immediately.
The Bank is also announcing today the development of a new Provincial Bond Purchase Program of up to $50 billion, to supplement its Provincial Money Market Purchase Program. Further, the Bank is announcing a new Corporate Bond Purchase Program, in which the Bank will acquire up to a total of $10 billion in investment grade corporate bonds in the secondary market. Both of these programs will be put in place in the coming weeks. Finally, the Bank is further enhancing its term repo facility to permit funding for up to 24 months.
These measures will work in combination to ease pressure on Canadian borrowers. As containment restrictions are eased and economic activity resumes, fiscal and monetary policy actions will help underpin confidence and stimulate spending by consumers and businesses to restore growth. The Bank’s Governing Council stands ready to adjust the scale or duration of its programs if necessary. All the Bank’s actions are aimed at helping to bridge the current period of containment and create the conditions for a sustainable recovery and achievement of the inflation target over time.
The Federal Government announced on March 18,2020 that it would provide increased flexibility to lenders to defer mortgage payments. Then the big-6 banks announced they would be allowing up to 6 months of mortgage payment deferrals to assist those impacted by COVID-19. The Monoline lenders followed suit. Since then they have all been doing as best they can to accommodate the massive volume of calls and emails, while implementing new processes and procedures almost daily to help handle these inquiries. Lenders are updating us daily/hourly as to what the best course of actions is, and I encourage you to contact your Mortgage Advisor for current advice.
Essential Services –Bankers, Mortgage Brokerages, Realtors and other Financial service providers have been declared essential services in Alberta. So we’re not going anywhere and will continue to be there to help you through this.
Banks are offering COVID-19 Relief on Auto & Personal Loans, Credit Cards, Credit Lines. Also Student Loans can be deferred.
Important note – a payment deferral is not a forgiveness of the amount owed. It means the payments are deferred to a later time, when we will have to pay them back, with a cost of interest charges on the interest deferred (aka interest on interest).
Credit Union customers – access to a variety of programs and solutions designed to ease difficulties with loan payments and short-term cash flow. Check with your Credit Union.
Here is what we have learned so far:
- Banks are prioritizing clients based on need and next mortgage payment date.
- Regardless of how urgent your situation is, it is going to take time to get a response. It can be frustrating to wait on hold, or wait for an email response, but please contact them before you miss a payment, as to not damage your credit.
- NEVER EVER be late for or miss a mortgage payment.
- Effectively the deferred interest is capitalized (added) into the mortgage balance owing.
- I have heard from clients who have received 6 months of deferred payments with no questions asked.
- Understand this is not always the case. You may be asked about your employment status and other reasons you have for requesting deferral. Some lenders will ask about your net worth status and liquid assets available. (If you do your regular banking with the same lender that holds your mortgage, they can likely assess this internally).
- Things like whether or not your mortgage is default insured aka (CMHC), collaterally charged (has a HELOC on it), the loan-to-value ratio, and if you have been set up on accelerated payments or applied any lump sum payments in the past will be considered.
- Each lender has their own criteria for deciding what criteria they will use in making mortgage deferral decisions. Based on many of my clients experiences, the consensus so far seems to be that often the best results are received when speaking directly with a bank representative. Not always, but most often. It is best to be willing to be on hold for an hour and maybe more, to achieve your desired outcome.
- Note- if you are a denied a deferral, try again via the same method or the other methods your lender offers (phone, website application or email). There is still not full consistency within each lender on what is granted and what is denied from day to day and person to person.
- Some clients are offered a 1-month or a 3-month deferral only and encouraged to re-apply with new status going forward. * PS to Alberta residents * We have had clients in the oil and gas industry report they were asked by the lenders if their layoff was directly due to COVID-19, or other factors. GREAT QUESTION. I believe the answer may be related to the apparent other challenges within the O&G industry and some lenders being sensitive to this as an area of risk to address.
- Mortgage distress, like any kind of distress, is relative. For some people, mortgage distress is due to worry about the coming disastrous economic effects of COVID-19 on their job or business. For other people, mortgage distress is being suddenly laid off with no income and unable to pay their Mortgage on Tuesday. All are valid concerns, however, some lenders are prioritizing and only dealing with those not able to pay their mortgage payment due within the next few days. If you don’t have concern about missing your next payment, consider sending an email or filling out a form for a call back later. I know waiting can be frustrating. In these times, exercising a little patience and freeing up the phone lines could help your friends and neighbours keep their home.
- If you believe you have some equity in your home, you might be able to avoid all of this by speaking to your Mortgage Broker and setting yourself up to access equity for an affordable fallback. You should do this before there are any negative changes to your income or home value. I would suggest NOW is the time. You may be able to refinance to draw out an emergency fund, set up a home equity credit line, a reverse mortgage, or even private financing to bridge the gap at this time.
- Self employed and commissioned workers: Some lenders will require “proof” that you’ve been laid off or your income has been impacted by COVID-19 in order to defer payments. For many of you, that is something that you won’t be able to document for months. Please feel free to e-mail me if you would like to explore your financing options outside of or in addition to deferred mortgage payments.
- Questions to ask your bank when you speak with them about a deferral:
- Ask your bank about the details of what their bank is offering.
- Does the deferred pay-down get added into the payments to keep the amortization the same, or is the amortization lengthened to fit?
- Some banks cap the deferred interest within the remaining term, some within the amortization. If within term then the lower the term the higher the new payment will be after the 6 months is up will be. If within the Amortization then generally the impact is less as the timeline is longer.
See the CMHC webpage on mortgage deferrals here
Now let’s look at the long term costs of a 6-month mortgage payment deferral
We will assume the deferral occurs in the first 6 months of the new mortgage, which is unlikely to happen but provides the most expensive case scenario. We will use the method used by most Credit Unions, and by TD Bank and others, whereby the bank will re-set you payment at the end of your current term, to have you pay back the accrued interest over the remaining entire amortization of the mortgage. This keeps the amortization period unchanged from its original length. This method is the most generous for your cash-flow, and is also the most expensive possible method.
- A $100,000 mortgage at 3.00% interest with a 25 year amortization would have a monthly payment of $473.25. We will assume it is on a 5-year term.
- If a client defers a $100,000 mortgage at 3% interest for 6 months you would accrue $1,500.00 in interest. The interest each month for those 6 months is on a static balance rather than on a declining balance, so this amount is slightly higher than the $1,490.70 in interest you would pay if the payments were not deferred.
- Once the 5-year term ends, and the mortgage renews the balance owing is higher by the accrued interest, plus interest on that accrued interest, plus the principal not paid and the interest on the principal not paid. All of that adds up to $3,266.87. You would have not made 6 payments totaling $2,839.50.
- So upon renewal the balance owing would be $88,741.17 instead of the $85,474.30 it would have been without a deferral.
- Therefore the total cost of the deferral at the end of the 5-year term would be $427.37. So the total cost of a 6-month deferral after 5 years is equal to 90% of one monthly payment.
- This assumes you pay all of that deferred money back on your mortgage at the end of that term. If you don’t then the cost will increase over time. Let’s look at that next.
- Assuming the new interest rate at renewal was unchanged at 3.00%, and renewing with a 20-year amortization, your new monthly payment would be $491.33 instead of $473.24, a difference of $18.09 per month.
- If you renewed again and again at the same interest rate until the mortgage was paid off you would have paid a total of $45,059.69 instead of $41,972.92, for a total cost of $3,086.77
TAKEAWAYS AND SUGGESTIONS:
- Taking a payment deferral on any debt is a defensive and protective move taken at a time of great uncertainty. You may need that money during this challenging economic time or you may not, but you won’t have it if you don’t take the deferrals available to you. And you likely don’t currently know if you will need it or not. If you know you will not need it, then why take it.
Some Thoughts for You:
- If you take a 6-month deferral and you put that money into a separate bank account and spend of it only what you must, and then when the dust settles you pay what is left in that account directly on that mortgage you will reduce the long-term cost of the deferral.
- Or, if when the dust settles you decide it is more important to reduce your overall monthly debt payments by the highest possible amount, then take that remaining money and pay down the debt that would reduce your monthly payments by the largest amount, or the debt with the highest interest rate.
- It’s your money. Use it in the way that best serves you.
I hope this information helps you in your decision-making and actions on your mortgage(s).
Thank you to both Garth Chapman and Sarah Boudreau of Jencor Mortgage for their hard work on gathering and putting this information together to share with everyone.
Banks offering COVID-19 Relief on Auto & Personal Loans, Credit Cards, Credit Lines
Credit Union customers – access to a variety of programs and solutions designed to ease difficulties with loan payments and short-term cash flow. Check with your Credit Union.
Important note – a payment deferral is not a forgiveness of the amount owed. It means the payments are deferred to a later time, when we will have to pay them back, plus the cost of interest charges on the interest deferred.
CANADA – COVID-19 Economic Response Plan: Support for Canadians & Businesses
NEW PROGRAM – CERB – This is Big!!
- CERB will give workers who cease working or are receiving reduced employment income because of COVID-19 a taxable $2,000 monthly payment.
- Dutton Employment Law Group’s excellent CERB review and FAQ
NEW PROGRAM FOR BUSINESSES – This will be a huge help for Employees and Contract Employees
A Federal 75% Wage Subsidy to help Businesses keep & return workers to payroll retroactive to March 15.
- It looks like the payment will be capped at 75% of $58,700 annual income, so $3,669 / month.
Canada’s Federal COVID-19 Economic Response Plan – click the link for details on existing programs
NEW INFO – It appears that the federal government will use the CRA ‘My Account for Individuals’ to register for or to access electronic payments. Apply here for an individual CRA account unless you already have an account.
- These appear to be Automatic (but you should double-check on that):
- Enhanced Canada Child Benefit for the 2019-2020 benefit year, by $300 per child
- GST Credit increase
- A one-time special payment by early May 2020 through the Goods and Services Tax credit. The average boost to income for those benefitting from this measure will be close to $400 for single individuals and close to $600 for couples.
- Delay to Income Tax filing deadline to June 1, 2020 and payment deadline to Aug 31, 2020
- These you must Apply for:
- EI Work Sharing Program
- Federal Student loan 6-month payment moratorium. Note: this is a deferment, not a forgiveness.
ALBERTA – Immediate relief for Albertans affected by the COVID-19 pandemic
NEW INFO – you will need a MyAlberta Digital ID account to receive Alberta government COVID-19 benefits,
There is normally a 10-day waiting period after uploading your driver’s license to the site waiting to receive by mail your verification code.
- Alberta student loan payments can access a 6-month, interest free, moratorium on payments.
- Emergency isolation support – a one-time payment of $1,146 will be distributed to bridge the gap until the federal emergency payments begin in April.
- Residential customers can defer electricity and natural gas bill payments for 90 days to ensure no one will be cut off, regardless of the service provider.
Important note – a payment deferral is not a forgiveness of the amount owed. It means the payments are deferred to a later time, when we will have to pay them back.
Other Existing Income Supports for Albertans – click the link for details on existing programs
Covid-19 Government Resources for Albertan Renters & Property Owners – courtesy of ‘COVID-19 Resources’
UPDATED – Health Resources official sites
For more information about COVID-19 itself, please check out these resources:
- Canada Public Health Services
- Alberta Provincial Health web pages
Compiled by- Garth Chapman – Jencor Mortgage