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.