With many Ontarians facing layoffs at work due to business loss or closures, there is a very real fear for homeowners that they may be unable to pay for basic needs, such as housing. For those who make regular mortgage payments, most of Canada’s major banks have begun to offer mortgage deferral programs to allow homeowners to keep more cash on hand to pay for other necessities during this unprecedented time. This can seem like an excellent option for anyone facing severe financial strain, and it may be, however, anyone considering taking advantage of these programs should be aware that mortgage deferral does not equal mortgage relief. Below, we outline what homeowners can expect should they decide to take advantage of this option.
What is “Mortgage Deferral”?
Mortgage payment deferral is the temporary suspension of mortgage payments during a period of financial hardship, such as job loss or illness. A deferral does not mean that the suspended payments are forgiven, however. Any payments suspended during the agreed-upon period will be added to the mortgage on the back end, along with additional interest. Homeowners need to be aware that by deferring payments, they do not become exempt from liability for those amounts; they are simply delaying them until a later time, plus interest and potential deferral fees.
Who Qualifies for Mortgage Deferral?
Anyone facing financial hardship can apply for mortgage payment deferral, however, in reviewing an application, the bank will also look at other assets and savings belonging to the homeowner. If the bank feels that the applicant has the means to make their mortgage payments, they will likely deny the application.
Disadvantages of Mortgage Deferral
In addition to adding fees and interest to the outstanding balance of a mortgage, mortgage deferral may also affect one’s credit rating, which can cause further hardship down the line. While most deferral arrangements will come with a notation that the bank will not report the skipped payments as “late”, many banks are not set up to manage this, particularly given the large volume of deferrals happening at one time.
In a recent article, consumer advocates with Canada’s major credit bureaus have said they are working to reduce the negative impact these programs may have on Canadians:
We understand that people are concerned about how deferred payments and other special arrangements may affect credit scores. We are working together as an industry to help minimize any negative impact on credit standing while maintaining the data integrity that underpins our ecosystem.
Anyone taking advantage of a mortgage deferral program should be sure to obtain confirmation in writing that the skipped payments will not be reported as late to the credit bureaus. This way, if a missed payment were to appear on a person’s credit report, they have the means to dispute and correct the mistake. While it is always advisable to periodically check one’s credit score, it can become particularly important when participating in this type of financial assistance program.
The Bottom Line
In a recent news release from the Canadian Bankers Association, over half a million Canadians have already requested mortgage deferrals, and the six major banks have deferred more than 10% of the mortgages they hold. Mortgage payment deferral may be a solution that can make all the difference, allowing a family to pay for other basic necessities such as food and medical expenses during our current health crisis. For families and individual homeowners who have no reserve savings, this may be the best way to improve cash flow in the short term. However, anyone with the ability to access funds to maintain mortgage payments in the interim should do so, in order to avoid paying unnecessary interest and other fees down the road.
The real estate lawyers at GLG LLP in Toronto assist clients with a full range of residential real estate services, including purchases and sales, financing and even litigation if necessary. The firm offers exceptional client service as well as a Bay St. experience with more reasonable rates. Call 416-272-7557 or complete the online form to arrange a consultation.