Nearly 1 million Canadians deferred over $1 billion in monthly mortgage payments during the pandemic. This number highlights the wave of financial instability that has inundated many nationwide.
If you’re one of those struggling to make a mortgage payment, or if you ever find yourself in this position, understanding what happens when you miss a payment can help guide your decision-making process.
Skipping a mortgage payment may seem like a solution when unexpected financial challenges arise. However, you must understand the consequences of deferred mortgage payments can affect your credit score, loan interest, and long-term financial stability.
Read on to learn more about deferring mortgage payments and its potential impact on your finances and homeownership.
What is Mortgage Deferral?
Mortgage deferral is a deal with your financial institution that lets you delay mortgage payments for a specified period. Following the deferral, you’re required to make up for the missed payments.
Repayment options may involve extending your mortgage term, adding deferred payments to your balance, or increasing future payments. While you defer, interest accrues, adding to your mortgage amount and potentially costing you more in the long run.
Who Qualifies for a Mortgage Deferral?
Eligibility for mortgage deferrals is determined individually by financial institutions.
You may be eligible if:
- You’re at risk of missing regular payments.
- You have either an insured or uninsured mortgage.
- Your mortgage is currently in good standing.
- Your property is your primary or secondary residence.
Remember that the decision to grant relief is at the discretion of your financial institution. To learn more about mortgage deferral options, contact your financial institution directly.
Impact of Mortgage Deferral on Your Principal Balance and Interest
Your mortgage payments include the principal and interest and may cover property taxes and optional insurance fees. Here’s how deferring your mortgage impacts these elements:
1. Impact on Principal Balance
Your principal is the borrowed amount, and with a deferral, you postpone paying it. If you owed $300,000 initially, you’ll still owe the same amount, plus interest, at the deferral’s end.
2. Interest Implications
Interest is the cost of borrowing, calculated based on your rate, principal, and mortgage term. During deferral, interest continues to accrue on the outstanding amount. It’s added to your mortgage balance at the deferral’s end or with each missed payment.
You end up paying interest on this new, higher balance, which includes deferred interest. This can result in paying more interest over your mortgage’s life, potentially costing you thousands.
3. Property Tax Considerations
If your property taxes are part of your mortgage, some institutions may allow deferral, while others may not. You might need to keep paying these taxes during the deferral.
4. Optional Credit Insurance
If you have optional credit insurance, its cost may be included in your mortgage payments. Some institutions might permit deferral, while others won’t. If you can’t afford it, discuss options with your financial institution.
Remember that mortgage deferral’s financial implications can be substantial, and it’s essential to understand how it affects your specific mortgage terms and costs.
Cancelling Your Mortgage Deferral Early
If your financial situation improves or you no longer experience financial hardship during the deferral period, you may consider terminating your mortgage deferral prematurely. This can assist in minimizing the additional interest expenses linked to the deferral.
Whether cancellation is possible depends on your financial institution, as policies vary. If your institution allows it, you can explore this option. If not, consider repaying the deferred amount without penalties.
End-of-Deferral Period: What to Expect
As the deferral period ends, it’s time to restart your mortgage payments. The good news is that you won’t need a lump sum or balloon payment to catch up on deferred amounts.
However, there is a catch: Upon resuming payments, your monthly mortgage installment will exceed its pre-deferral amount.
Here’s why: Most lenders, including major banks, add the interest accrued during the deferral to your mortgage balance and recalculate future payments. This adjustment ensures you still pay off your mortgage by the original end date, resulting in a higher monthly payment.
For instance, a $200,000 mortgage at 3% with a 15-year term could see a 4.3% increase, translating to $59 more per month in our example.
What Will Your Increased Mortgage Payments Look Like?
The increase in your post-deferral mortgage payments depends on various factors. Your new payments will be higher if you have a larger mortgage or a higher interest rate. Additionally, the time left in your current amortization period is crucial.
Those with more years remaining will experience a milder increase than those with shorter remaining terms. Expect a more significant increase if you have a substantial outstanding balance but a short remaining amortization.
While some lenders, such as CIBC, offer the option to pay accrued interest at the deferral’s end, reducing your principal and future interest, this may not be feasible for many Canadians.
What if I Can Only Make Partial Repayment?
As your deferral period nears its end and you find it challenging to resume regular payments, there are strategies for this situation. The approach varies based on your needs and expectations regarding the timeline for your financial recovery.
1. Utilizing a HELOC or Line of Credit
If you anticipate a slight delay in making your mortgage payments as agreed with your lender, consider using a line of credit to cover the initial one or two payments. You can then repay the line of credit when you receive your next paycheck. However, be cautious and only choose this option if your finances improve soon.
2. Extending the Mortgage Amortization Period
If higher mortgage payments strain your budget, talk to your lender about extending your repayment period. This can lower your monthly payments but means more interest paid over time.
In Canada, the maximum term is 25 years for insured and 30 years for uninsured mortgages. Consider this option if your income is still reduced and you haven’t reached the maximum term.
3. Requesting an Additional Extension or Extended Mortgage Payment Deferral
If you’re still facing financial difficulties, ask your bank for a longer deferral, even though they might not like it. They may grant a short extension to ensure they get their money back hassle-free. However, remember that this only delays the issue and increases interest costs, reducing your home equity.
4. Exploring the Blend to Term or Blend and Extend Option
If the current rate is lower than your mortgage rate, this can reduce your mortgage payments. With a “blend to term” option, this new interest rate applies until your mortgage term ends. Your mortgage term is the duration of your mortgage contract.
You might also have the option to extend your mortgage’s length before the term ends, giving you an extended period with the new interest rate; this is often referred to as an early renewal option called “blend and extend.”
5. Switching to a Fixed Interest Rate
If you’re having trouble with payments and have a variable rate, consider switching to a fixed rate with lower interest. It can reduce your monthly payments and shield you from sudden interest rate hikes, like changes in the Bank of Canada’s overnight rate.
6. Negotiating Special Payment Arrangements
Your bank might provide customized payment plans tailored to your circumstances. This arrangement involves both you and your bank working together to gradually catch up on overdue payments within your means. These special arrangements could temporarily lower your mortgage payments for a set period.
7. Considering Interest-Only Payments
Interest-only payments let you delay repaying the mortgage principal while still covering the interest. Some lenders permit deferring a portion of the principal with a repayment schedule later. However, be aware this choice can raise your overall mortgage expenses.
8. Utilizing Prepayment and Re-Borrowing Strategies
If you’ve made extra payments during your current mortgage term, your financial institution might permit you to borrow those funds again. This sum can be useful for covering your mortgage payments.
9. Understanding Capitalization
Capitalization means adding overdue payments to your mortgage balance. Typically, you can do this just once during your mortgage term. It can substantially raise your total amount owed.
Capitalization may include:
- Missed mortgage payments and interest
- Property taxes
- Utility bills
- Home repair expenses
- Condo fees
- Any outstanding charges
10. Initiating a Creditor Insurance Claim
If you possess optional credit insurance for your mortgage, you could be qualified for a creditor insurance claim in specific circumstances, such as job loss or illness.
However, specific conditions must be met for approval, such as permanent termination of your employment. Once your insurance company approves, payments typically start after a 60-day waiting period.
What Happens if You Default on Your Mortgage Payments?
Defaulting on your mortgage is a serious matter with potential consequences, including the risk of losing your home. In Canada, lenders have various options, but the most common are the power of sale and judicial foreclosure, both enabling them to sell your property to recover missed payments.
But a forced sale doesn’t happen immediately after a deferral period but becomes an option if you don’t resume payments. When you receive a legal Notice of Sale, a short redemption period allows you to catch up on your mortgage. If you miss this window, you can refinance the entire mortgage.
1. Restructuring Mortgage Arrears
If you’re behind on payments, consider downsizing, selling your property, or renting until your finances improve. Alternatively, explore second mortgage refinancing, but it might be challenging if your current mortgage is distressed.
2. Should You File a Consumer Proposal?
A consumer proposal won’t restructure your mortgage but can help manage your finances to afford mortgage payments. It’s useful if you have significant unsecured debts or some home equity and believe you can manage mortgage payments once other debts are resolved.
Protect Your Home and Financial Stability – Explore Your Options Today
Your home is one of your most significant investments and protecting it should be a top priority. In times of mortgage payment difficulty, proactive communication with your lender and exploring financial alternatives can be a lifesaver.