✔Mortgage lenders have introduced new deferral options in response to the COVID-19 pandemic
✔Deferring your mortgage payment may improve cash flow right now, but will result in increased interest fees over time
✔Reach out to your mortgage lender before you miss a payment, and be sure to understand all of the fine print before opting to defer
The COVID-19 pandemic has created unexpected financial hardship for many Canadians, particularly as a result of sudden income loss due to temporary business closures. This strain is taking its toll on families across the nation, and many are looking for a solution. In a perfect world, families would simply dip into their ‘rainy day fund’ to cover any gap in earnings, but the reality is that most Canadians live paycheque to paycheque with limited savings to draw from. This isn’t something to be ashamed of - it’s incredibly common, even in families with two middle class incomes.
Mortgage payments make up a significant percentage of many Canadians’ fixed expenses, and can present a challenge to those struggling to make ends meet. On March 17, 2020, the six major Canadian banks announced a series of financial relief measures designed to support those facing hardship due to COVID-19. Sharing the news in a joint press release, the banks stated, “This support will include up to a six-month payment deferral for mortgages, and the opportunity for relief on other credit products.” Other mortgage lenders announced similar relief measures (and, for what it’s worth, many lenders offered more limited deferral options prior to COVID-19).
While hitting pause on your mortgage payments may seem ideal, it’s important to review all angles and make a decision that’s best for your family. Here’s a look at some of the benefits and downsides of deferring your mortgage during the coronavirus pandemic.
More cash flow, but more interest payments
There are immediate upsides to deferring a mortgage payment (or a series of mortgage payments) while dealing with income loss due to Covid-19. Namely, you’ll have more flexibility with your cash flow, including income from CERB payments. During a crisis, a family’s basic needs must continue to be met. Shelter is critical, as are groceries and other household essentials. If you can free up funds by deferring a major part of your fixed expenses, you will be able to better manage the cost of essentials such as food and toiletries. Furthermore, you’ll be in a better position to keep up with utility bills, car and cell phone payments, credit card bills and other expenses until some or all of your income has been restored.
That said, a mortgage deferral doesn’t come for free. When you defer a mortgage payment, interest accrued during the deferral period will typically be added to the principal balance of your mortgage loan. This means paying more interest over the total lifespan of your mortgage - in some cases, amounting to several thousand dollars. While it may be worth it in the long run - particularly if you’re at risk of going into arrears on your mortgage - it’s best to understand the full impact of a deferral before committing to this option.
It’s better to defer than default if you cannot make your mortgage payment
If you are unable to pay your mortgage at this time, it’s best to reach out to your lender before you miss a payment - not after it’s happened. Defaulting on a mortgage payment can lead to some pretty harsh financial penalties from your lender, and going into arrears may negatively impact your credit score. To avoid these scenarios, reach out to your mortgage lender as soon as possible and create a plan to defer one or more payments. It’s best to check the fine print and ask questions before moving forward. For example: how much interest will this add to the total cost of my mortgage over time? Will my credit score be negatively impacted if I choose to defer one or more mortgage payments? Can I double up on payments down the road if my financial situation improves? The answers will help you make an informed and effective decision.
It may also be worthwhile to ask your mortgage lender about custom solutions. They may be willing to extend your mortgage amortization to reduce monthly payments, temporarily reduce payments or present an additional solution you hadn’t considered. As noted above, ask plenty of questions and be sure to understand both the pros and cons of any mortgage relief plan.
We are here to help
While times may be tough, there is light at the end of the tunnel. Deferring a mortgage payment isn’t your only option - you may want to use one of several relief measures to help manage your finances in the months to come, or opt for a personal loan instead. This is a great overview of ways to deal with bills during financial hardship, and here’s a rundown of federal relief measures that you might qualify for. There’s also this helpful budget creator designed specifically for emergency situations.
Please visit our COVID-19 Resource Centre for more information on federal financial assistance and more. If you require further guidance, please contact your easyfinancial branch or easyhome branch, or give us a call at 1-888-502-3279. We know that each of our customers’ situations is unique, and are committed to working with you to help you find a solution that will best fit your needs.