Mortgages

Worried about paying your mortgage or qualifying for deferral? Here’s what you need to know

Mortgage deferral isn't a government grant but a lender decision. To help navigate these uncertain times, homeowners and landlords need to know where to find relief, how to protect their credit score, what investments to cash-in and who they should listen to for advice
Couple with calculator choosing mortgage rates. Lock in mortgage rates

Homeowners should not expect to hit pause and skip six months of mortgage payments — despite the enticing headlines from last week.

Turns out, the mortgage deferral relief initiatives that were announced on Thursday, March 19, 2020, can offer help and hope for only the hardest, most critically hit homeowners during the COVID-19 fallout. That’s because the announced mortgage deferral plan isn’t a government grant, but a lender decision.

Five days since the announcement and property owners with outstanding mortgage debt are reporting big problems with trying to get access to the mortgage deferral relief program. 

Turns out the big six banks (along with a handful of dedicated mortgage lenders) will adjudicate each case based on the lender’s internal criteria. While the intent is the same — to prevent full-blown defaults across a bank’s lending spreadsheet — the criteria used to make the decisions (and the risks a lender is willing to take on) differ from bank to bank, region to region and borrower to borrower. 

“While the plan sounded like a government grant, the reality is the borrower must have a profound need,” explains Ron Butler, an independent mortgage broker and founder of Butler Mortgage, as he took to Twitter over the last few days. As one of the outspoken industry veterans, Butler used Twitter to warn borrowers and colleagues that any mortgage deferral decisions would need to be made on a case-by-case basis

Some borrowers may be given a reprieve from having to make monthly mortgage payments in the near future, but to qualify for this relief, borrowers will need to show evidence of unemployment, diminished assets, lack of savings and other financial hardships that would make it difficult to impossible to make a near-term mortgage payment. 

To help you navigate the recently-announced mortgage relief and potential payment difficulties, here are eight things you need to know.

Additional reading to help homeowners and renters during the COVID-19 outbreak:

#1: Use your mortgage ‘skip-a-payment’ option

For homeowners facing financial hardship due to the impact of COVID-19, consider using the privileges offered in your mortgage contract, such as the ‘skip-a-payment’ or ‘interest-only’ options. 

The type and extent of these privileges will vary based on the terms in your mortgage contract, but, in general, you can: 

  • Skip-a-payment: You can skip one mortgage payment (which includes both interest and principal portion of the payment) once every 12 months 
  • Interest-only: You can pay just the interest portion of your mortgage loan. Most mortgage contracts do not offer this option, as it’s typically found only with Home Equity Line of Credit (HELOC) loans or with interest-only (I/O) mortgages (like those offered by Merix Financial). 

#2: The ‘skip a payment’ option does not hurt your credit score

mortgage-deferral-COVID-19-skip-a-payment

While misinformation is out there, homeowners need to know that the use of a ‘skip-a-payment’ privilege will not hurt their credit score

By selecting to ‘skip-a-payment’ you let the lender know, in advance, that you will not be making a mortgage payment on the contractual date. If you were to ignore this step and choose not to notify, your lender would report late or non-payment to the credit bureaus — which would result in lower credit scores. 

For some borrowers, just one late payment can drop a credit score by 7 to 10 points, while for others, it could take a few late payments to have an impact on credit scores. Either way, a late payment isn’t good. 

To avoid the fallout of a non-payment, request to skip-a-payment. Virtually every bank and mortgage lender is asking borrowers to make this request online through their secure banking portals. If you require assistance don’t bother going into a branch, since most brick-and-mortar locations are temporarily closed. Instead, call to make an appointment to speak in-person to an advisor or mortgage agent or call to speak to someone over the phone — just be prepared to wait on hold for 60 minutes or more before getting through to an agent. 

#3: Don’t liquidate your RRSPs, yet

Homeowners worried about mortgage payments after they’ve skipped a monthly payment would be wise to wait it out. 

Don’t borrow more to make these payments and don’t liquidate your investment accounts, including your registered savings accounts. 

For example, if you anticipated a potential job loss a month or two from now, you may be tempted to cash in your RRSP, in order to shore up your cash reserves. Don’t, as taking these actions prematurely could prompt significant losses. 

For instance, if you withdrew $15,000 from your RRSP now, you would be forced to pay a 30% withholding tax (20% for withdrawals between $5,000 and $15,000 and 10% for withdrawals up to $5,000). Then, you’d have to claim the money you withdrew from your RRSP as income and pay tax on this amount, based on your marginal tax rate. 

Another reason not to cash in your RRSP or your other registered investment accounts, such as your Tax-Free Savings Accounts, is that you will crystalize the loss your portfolio took when the market tanked, starting on March 9, 2020, when The Dow fell almost 7.8%. (It fell again on March 12, 2020, by 9.99% and again on March 16, 2020, by 12.93%). Sell now and you lock-in your losses. Wait and hold and you could either minimize the losses (or, wait long enough and allow the market to recover without selling and you could experience no financial loss). 

That said, if you’re facing financial hardship with no other options, consider cashing in your TFSA or GICs, or sell the holdings in your non-registered investment account (and take the capital loss as a tax deduction) before raiding your RRSP. 

#4: Ignore bad financial advice

Finally, homeowners facing some tough weeks and months ahead need to consider where they are getting their advice. 

Butler, who is one of the more outspoken industry veterans, took to Twitter late last week to warn colleagues and Canadians of the dangers of taking on more debt at this point in time. 

“Because we live in a world with a few A**holes, a tiny number of financial advisors [are] suggest[ing to] apply [for mortgage deferral] and then put the 6 months [of] payment money in[to] the stock market,” writes Butler. 

When the economy takes a turn for the worse, risks increase, including whether or not you’ll be able to pay your current debts or keep your current job. To minimize the risks to you and your family, don’t take on new debt. This includes personal loans, car loans, student loans or even home loans, such as refinancing. 

Instead, consider ways you can cut expenses or earn extra income (while still staying safely isolated). 

While you don’t have to cut out all possible pleasurable facets of your life, during these economically uncertain times, it is a good idea to pay extra special attention to how you spend and where your money goes. Review your budget; analyze your credit cards or bank account statements. Look for simple ways to cut and save, first, before taking more drastic steps. 

#5: Use current liquidity options (such as HELOCs)

where-does-real-estate-commission-go

 

Personal finance experts constantly hammer the importance of an emergency fund, but for many Canadians, this goal isn’t always achievable. However, quite a few Canadians do have access to lines of credit, such as Home Equity Line of Credits (HELOCs) — and, given this unprecedented moment in time, planners are suggesting homeowners tap into this HELOC to help cover budget shortfalls.

Taking a step back, let’s see why HELOCs can help in a situation like this, where the global COVID-19 pandemic has severely impacted people’s health and finances.

A HELOC is a line of credit that allows you to borrow and pay back as much or as little as you want as long as you pay the interest each month on the current balance owed. It’s what is known as a revolving debt — the same type of lending option you get when you use a credit card — which means you have a maximum amount you can borrow and no fixed monthly payment (other than the interest) is required. When using a HELOC, the more you borrow the less you have to borrow and the more interest you owe on a monthly basis. As soon as you pay down a portion of the debt, you have access to borrow that amount again.

Typically, HELOCs offer the borrower a lower rate with the best HELOCs offering borrowers a rate of prime minus 0.5%. (As of March 23, 2020, prime sits at 2.95% for most big banks, so borrowers with the best rates have HELOCs with an interest rate close to 2.4%).

If you already have a HELOC set up, consider using this credit to help with the current financial crunch. While it doesn’t feel great to borrow in order to make a mortgage payment (so, using one debt to pay for another), it is a good short-term option until you can sort out a more permanent solution.

#6: Apply now for a low-interest loan (such as a HELOC)

If you don’t have a HELOC already set up, it’s a good idea to apply as soon as possible. But here’s the bad news: applications and approvals for HELOCs take time. Typical waiting times are between three to six weeks — and these are not typical times given how swamped banks are with debt deferral applications. Still applying now could help you avoid future cash crunches (and it looks like the fallout from coronavirus breakout is going to last for quite some time).

That said, don’t bother applying if you need the credit now. (Instead, use one of the other tips offered in this article.) Right now, lenders are quite strict about who gets what credit, so approval on new HELOC applications will only happen if your finances are in good shape. That means you need to have a sizeable amount of equity in your home — at least 25% or more. Prepare yourself for longer waits and for nominal fees to set-up a HELOC (up to $1,000 to pay for legal and appraisal fees). Once approved and set up, there are no ongoing fees to keep the HELOC open. And you don’t have to use the HELOC, just keep this revolving credit line as a backup emergency fund.

#7: If you’re a landlord, don’t rely on proposed mortgage deferral relief

Landlords are particularly susceptible to the financial impact of COVID-19. Whether you are an Airbnb host, rent out a suite in your principal residence, or own one or more investment rental properties, you could be facing a cash crunch that makes it hard (or even impossible) to make your monthly mortgage payment.

Unfortunately, the mortgage deferral relief program that was announced in mid-March won’t help landlords. (Unless you rent out a suite in your home, then you could apply for mortgage deferral relief. Now, if you get relief, pass it on to your tenant who is also suffering!)

Twitter feeds are awash with complaints of landlords getting mortgage relief and not passing it on to their tenants. However, these tweets are from individuals and organizations located outside Canada. That’s because, across the world, banks are providing mortgage deferral relief to borrowers. In some countries, this relief is offered to landlords. In Canada, it is not. 

As early as Friday, March 20, 2020, lawyers, mortgage brokers and paralegals were confirming that landlords would not qualify for mortgage deferral relief. In short, to qualify for mortgage relief, a borrower must prove hardship and prove that the mortgage is held on their principal residence.

“I’ve seen copies of letters from the banks…In order to get relief, one of the conditions is that the [property be] the owner’s primary residence,” wrote Harry Fine, a paralegal based out of Toronto.

That means small landlords, who rely on rental income to pay the mortgage on the rental property, cannot get mortgage deferral relief from any of the big six banks (or mono-lenders participating in mortgage relief).

“No mortgage relief on rentals.”
— Harry Fine, paralegal
 

It also means that landlords may face a mortgage default sooner than other property owners, as moratoriums on paying rent and  evictions are implemented across the country.

Ontario, Quebec, Nova Scotia and B.C. have all taken measure to prevent some or all landlords from evicting tenants affected by the spread of COVID-19. Local government authorities in these provinces also stated they are exploring other ways to address concerns from residents unable to afford rent or mortgage payments amidst layoffs and work stoppages due to the coronavirus outbreak.

Yet, even without protection, some tenants are proactively telling landlords they can’t pay rent — some as early as April 1, 2020.

Fine shared his experience in a tweet: “I have landlords begging me to help them [but] there’s no mortgage relief on rentals. Tenants say they have stopped paying rent. Landlords [are asking] how long? I tell them, who knows [it] could be a year until [the financial] system is functioning. [That’s when the] landlord starts to cry [and] asks how [to] keep [the rental] house.”

One of the biggest frustrations, right now, is the message that landlords can (and will) get mortgage relief and, as a result, shouldn’t require or insist on the payment of rent. In a series of tweets, Fine explains that tenants don’t seem to understand that non-payment of rent can still get you evicted (in some provinces, now, and in other provinces after the moratorium is lifted); tenants also don’t seem to appreciate that any halt on rent payments will work the same way as mortgage deferrals: Unpaid rent is deferred and this sum is either paid in full, at a later time, or tacked on to current rent obligations and paid in installments until the debt is paid off.

To be proactive, Fine suggests landlords write and call their MPP. “We need a solution for rent payments for April 1st; one that protects tenants and small landlords,” writes Fine. For more information, or for information you can use in your letter to your member of parliament, go to Fine’s blog.

For landlords facing an immediate cash shortage, due to a tenant’s inability to pay rent, consider your options:

  • Use your lender’s ‘skip-a-payment’ option;
  • Use up previous prepayment room (see below);
  • Use HELOCs and other low-interest revolving credit;
  • Cash-in savings and, if necessary, investments (see #3 for tips);
  • Consider making on-time, minimum payments only to free up cash to pay mortgages;
  • Apply now for a HELOC, to stop a near-future credit crunch;
  • Proactively call your lender to find other options.

#8: If you are struggling with your mortgage debt, be proactive

woman on phone calling lender while on computer - mortgage default, call lender, credit crunch

Believe it or not, mortgage lenders do not want you to default on your mortgage — either on your primary residence or on secondary or investment properties. Lenders are in the business of long-term profits earned from interest on loans; they are not in the property flipping business. As a result, most lenders are very open to finding creative solutions to keep you from defaulting.

If you find yourself struggling to make mortgage payments, and you’ve exhausted other options — such as skip-a-payment, using a HELOC, and strategically liquidating other assets — then it’s time to chat with your lender.

While a personalized solution will differ from person to person and lender to lender, the general options available include:

  • Apply for the CMHC-insured mortgage deferral relief: If your down payment was less than 20% when you bought your home, you may be eligible for the CMHC-insured mortgage deferral relief program that was announced mid-March 2020. This relief allows homeowners with high-loan-to-value mortgages to defer mortgage payments for up to six months. The caveat is that you or someone in your family that you care for must be affected by COVID-19.
  • Using up previous prepayment room: If you’ve made prepayments against your mortgage in the past, you may be allowed to defer more than one mortgage payment (which is what skip-a-payment allows). Call or go online to chat with your lender to find out if you qualify.
  • Extending your mortgage amortization: Your lender could renegotiate your loan terms and increase the amortization, which is the length of time it takes to repay your entire mortgage debt. Extending your mortgage amortization helps to reduce the monthly mortgage payment and this can help if you are in a cash crunch and need to reduce your current debt repayments. Keep in mind that extending your amortization is renegotiating the loan, while most lenders won’t charge you a penalty for this, they will need a credit check, which means a hit against your credit report. (Read more on the importance of credit scores.)
  • Deferring and adding missed payments to your balance: If your down payment was more than 20%, or you have paid off enough of your mortgage that you have more than 20% equity in your home, you may be eligible for longer-term mortgage deferral, but this is up to your lender’s discretion. Also, those that recently started their mortgage (either a newer homeowner or someone who recently renewed) should expect to have more interest tacked on to their overall debt principal. That’s because mortgage deferral adds up all the interest you would normally pay during the deferral period, say six months, and adds it to the overall mortgage loan you currently hold. For some homeowners, opting for a deferral could add $5,000 to $10,000 to their debt in just six months.
  • Lender-specific solutions: Your lender may have other creative solutions to help you manage your ongoing debt obligations. Keep in mind, however, that you should not be pressured into borrowing more money, purchasing additional products or liquidating other assets. If this happens, contact the bank’s manager or ombudsman immediately.

While every financial situation is different, the key to tackling the impact of COVID-19 on your monthly budget and your mortgage debt is to get educated and be proactive. Remember to keep paying your bills on time, even if it’s only making the minimum payment. Missing or late payments will be reported on your credit report, which could lower your credit score and make it harder for you to obtain credit now and in the future.

Romana King
Romana King

Romana King is an award-winning personal finance writer and the current director of content for Zolo. King has contributed to business and lifestyle publications including CBC.ca, Toronto Sun, Maclean’s, MoneySense, Globe & Mail Custom Content Team, and Toronto Star. She is a passionate speaker about financial education and engages her audience on a variety of personal finance topics from kids and money, home buying and selling tips, and estate and investment planning. King won the 2015 SABEW Business Journalism award and is currently nominated for a COPA 2019 award, Best Service Article, for her annual project Best Deals in Real Estate. As editor of CI Top Broker, King guided her magazine to obtain its first KRW Business Journalism nomination, and she was part of the small team in 2011 that helped MoneySense win Magazine of the Year at the 34th annual National Magazine Awards.

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