When the COVID-19 crisis hit at the beginning of 2020, millions of Canadians saw their income reduced significantly or lost it altogether. Renters struggled with rent payments; homeowners were worried about meeting their monthly mortgage payment.
The government took widespread measures to provide citizens with financial support during the pandemic through programs like CERB. Mortgage lenders stepped up with payment deferral programs to help homeowners experiencing financial hardship due to COVID-19.
Close to 1 million Canadians1 deferred more than $1 billion2 in mortgage payments each month during the program. And while mortgages accounted for 88%3 of all loan balances deferred, this only represented 27% of all credit accounts. Canadians struggled with more than mortgages – 32% of account deferrals were credit cards, 10% were auto loans, and 13% of deferral requests were for bill payments.
If you are now facing the end of your mortgage payment deferral period, here is what you need to know about what happens to your payments and what to do if you can’t pay your new, post-deferral mortgage payments.
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How mortgage deferral affects your principal balance and interest
During COVID-19, CMHC-insured mortgages were eligible for up to 6 months of payment deferrals. Non-insured mortgages deferral periods are at the discretion of your lender but were similar.
Deferring your mortgage payments does not erase, cancel, or eliminate any of the amount owed.
While you skipped mortgage payments, you did not reduce any principal during the deferral period.
Your mortgage lender also continued to charge interest during the deferral period. This interest is added to your outstanding mortgage balance, which means that the total amount you owe is now higher.
For example, at a fixed interest rate of 3%, every $200,000 in mortgage debt deferred for six months will add $2,981.40 in accumulated interest to the principal. The new mortgage balance owing at the end of the period would be $202,981.
What happens at the end of the deferral period?
When the agreement to defer your mortgage payments comes to an end, you are required to resume payments.
The good news is you do not have to suddenly come up with a lump sum or balloon payment to catch up on all deferred payments. The bad news is, when you resume payment, your monthly mortgage payment will be higher than it was pre-deferral, and here’s why:
Most mortgage lenders, including the big six banks, add interest charged during the deferral to your mortgage and will recalculate future payments. Payments will be adjusted so that you pay off your mortgage at the same date you would have before deferring. Paying off what is now a higher mortgage outstanding at the same end date means your monthly payment must go up.
Here is an example:
A $200,000 mortgage at 3% with a 15-year amortization has a monthly mortgage payment of $1,379. After deferral, amortizing $202,981 over the remaining 14 years and 6 months requires a monthly payment of $1,438.
The end result is an increase in your monthly mortgage payment – in our example 4.3% or $59 a month.
How much higher will your new mortgage payments be?
The larger your mortgage and the higher your interest rate, the higher your new post-deferral payment will be.
How long you have left in your current amortization period will also have a significant effect. Someone with 20 years remaining to amortize the extra interest will have a lower increase to their regular payment than someone who has 10 years remaining on their mortgage. If you have a high outstanding balance, but a short remaining amortization, your increase could be significant.
Some lenders, like CIBC, give you the option to pay accrued interest at the end of the deferral period. This has the advantage of lowering your principal balance and reducing the future interest. However, this is not a solution many Canadians can afford.
What happens if I can only partially repay?
If your deferral period is ending and you still can’t resume payment, there are ways to manage the situation. Choosing the best of them depends on your personal circumstances and how soon you expect your financial situation to improve.
Finance payments through a HELOC or line of credit.
If you think that you can resume the payments soon, but not really on the date you agreed on with your lender, you may consider borrowing from a line of credit. By doing this, you can repay the first one or two mortgage repayments with your line of credit and then use a future paycheque to pay down that debt.
However, keep in mind that this is only a good option if you’re absolutely sure your cash flow will resume shortly. If it doesn’t, an unsecured or home equity line of credit could be a very slippery slope that may cause your debts to spiral out of control.
Extend the amortization period.
If you think the increase in your mortgage payment will strain your budget too far, open discussions with your lender to lengthen the amortization period over which you repay the loan. Extending the length of time over which your mortgage is repaid can reduce your monthly mortgage payments. Recognize, though, that a longer amortization means you will pay more interest over the life of the mortgage.
The maximum amortization period in Canada is 25 years for insured mortgages, 30 years for uninsured mortgages. If your income is still reduced and you are not already facing the maximum amortization length, this may be an option that can help you lower your future monthly mortgage payments. Be sure to ask your lender if there are any penalties associated with changing your mortgage terms and factor these in as additional costs.
Ask for another extension.
Banks are likely expecting a second wave of deferral requests. If you are still experiencing financial hardship, see if your bank will provide you with a longer deferral period. They may or may not agree, but it’s worth a try. While lenders might not be happy to hear that you need more time, they may still grant you another short extension because, in the end, they need to get their money back and would like to do so without too much hassle.
Recognize, however, that this is just prolonging the problem and further erodes your home equity with additional interest costs.
What happens if you default on your mortgage payments?
Defaulting on a mortgage has serious consequences, and you need to understand that you can lose your house if you don’t deal with missed payments soon enough.
The steps lenders take when a borrower defaults on a mortgage may differ depending on where you are in Canada, but the two most common options include the power of sale and judicial foreclosure. Either option allows a mortgage lender to seize your home and sell the property to recover mortgage arrears.
A forced sale is not going to happen immediately at the end of the deferral period but is a legal option available to lenders if you fail to resume payments once your deferral period ends.
If you receive a legal Notice of Sale, you will have a short redemption period in which to bring your mortgage current. Pass this window, and you will need to refinance the entire mortgage with a new lender or walk away.
Restructuring mortgage arrears
If you are behind on your mortgage payments, the solution may be to restructure. At this point, you can:
- Sell and downsize on your own, perhaps rent until your financial situation improves.
- Refinance any arrears with a second mortgage if you have enough equity and credit capacity. However, if you are unable to make your mortgage payments now, a second lender may not be interested in taking on a distressed loan.
- Walk away.
Should I file a consumer proposal?
A consumer proposal is not a way to restructure your mortgage, but it can be a way to restructure your cash flow so you can afford your mortgage payments. A proposal can help you keep your home by reducing credit card and other non-mortgage debt so that you are able to keep up with your mortgage payments.
A Licensed Insolvency Trustee helps you negotiate a consumer proposal with your unsecured creditors to pay back what you can afford.
A consumer proposal can help you keep your home if:
- You have significant unsecured debt like credit cards, bank loans, lines of credit, payday loans and certain student debt
- You have some equity in your home and want to keep your house
- You believe you can afford your mortgage payments once your other debts are eliminated.
- You cannot qualify for a second mortgage
If you choose to walk away because there is no equity in your house, a consumer proposal can also help you stop your mortgage broker from suing you for any shortfall.
The lending community offered deferrals to avoid a wave of mortgage defaults, foreclosures and bankruptcies. While the official deferral period may be ending, many Canadians have not returned to full time employment and are experiencing financial insecurity.
If you have deferred your mortgage payments and you find yourself in the situation where you can’t resume payments:
- Contact your lender to see what repayment arrangements you can afford and that they will accept
- Talk with a mortgage broker about the feasibility of refinancing
- Talk with a Licensed Insolvency Trustee to see about restructuring away non-mortgage debt.
The better part of 2020 has been anything but normal, and many Canadians may continue to struggle to keep their home. If you can’t pay deferred mortgage payments, it may be time to look at multiple debt relief options available for Canadians.
- According to the Canadian Bankers Association, 760,000 people chose to put their mortgages on pause. This represented approximately 16% of residential mortgages held by the big six banks or 1 in 6 mortgages. Add in deferrals offered by non-bank mortgage lenders, and you have close to 1 million Canadians who took advantage of the ability to skip a payment during the COVID-19 deferral period.
- Data from TransUnion Q2 2020 Financial Services Canada Industry Insights Report