Question. Our family has been financially impacted by the shutdown due to COVID-19, and we are really having trouble making ends meet. I noticed recently that banks are offering people the option to defer their mortgage payments for a while. Is this something I should do? Are there any negative consequences?
Answer. These are definitely challenging and unprecedented times. Many families have at least one member of the household temporarily unemployed or otherwise unable continue working as they have children at home to care for. It’s no surprise that many are now struggling to meet financial obligations.
In response, the “Big 6” banks in Canada – TD, CIBC, BMO, RBC, Scotia, and National Bank – have all announced that they are offering flexible solutions to help their customers during the COVID-19 crisis. Most importantly, the banks have indicated that some customers could be granted a deferral on their mortgage obligations for up to 6 months. Note, however, that this isn’t a blanket offer, and rather, the banks have indicated that they would look at everyone’s situation on a case-by-case basis.
So, have many people taken the banks up on this offer? You bet. The announcement regarding the mortgage deferral was made by the Big 6 banks on March 17th. Two weeks later, by April 3rd, a report by the Canadian Bankers’ Association indicated that half a million Canadians had taken the banks up on their offer.
But of course, just because many others have done so, doesn’t mean you should. How can you decide whether or not this is a good decision for you?
Potential Pitfall – Extra Interest Charges
First and foremost, let’s clarify that banks are offering a deferral of payments, not a forgiveness of payments. That is, you still have to make the payments, you just don’t have to make them right now.
The potential pitfall of this strategy is that, for each month you defer your payment, the interest for that month is still charged, and is then added to your outstanding balance owing. The result is that you will end up paying interest on top of deferred interest, and this will increase your overall cost of borrowing.
By how much? Well, everyone’s situation is different, and you need to crunch the numbers to find out. Better yet, get your bank or mortgage representative to crunch the numbers for you.
If you’re thinking about deferring your mortgage payments, here’s the key question to ask:
“How much additional interest will I be charged as a result?”
Before you make any decision, you need to get a straight answer on that question. Your banking or mortgage representative can provide this to you – it should not be a mystery. This is the only way you will be able to know for sure what the consequences are. And then, no matter what you decide, the important thing is that you will be making an informed decision.
For some families with a small mortgage payment, a low interest rate, and a deferral of only a month or two, the additional interest may only amount to a few hundred dollars. However, for others, it can be well into the thousands. As this CBC article illustrates, one family incurred additional mortgage interest charges of $7,400 for just a 4-month deferral on their mortgage payments.
If you intend to defer your mortgage payments, it’s critical that you apply for the deferral before skipping any payments. That is, you have to apply and receive approval first, otherwise you will be penalized.
Furthermore, each institution may have slightly different rules, and a slightly different application process. Specific information regarding COVID-19 from the Big 6 banks, and the application process for mortgage deferrals, can be found by clicking the links below:
In addition to the bank-specific information indicated above, further information on mortgage deferrals is available from the Canadian Mortgage and Housing Corporation (CMHC) website.
Early reporting had indicated that customers who elected to defer their mortgage payments could also face a hit to their credit scores. However, the banks have since clarified that this is not that case, and that customers who elect to defer their mortgage payments will not have their credit scores negatively impacted. However, to err on the side of caution, you should ask your institution directly, and get them to confirm for certain that your credit score would not be damaged before you make your decision.
Mortgage Deferral Bottom Line
Before availing of the mortgage deferral options from your bank, it’s important to determine if you really need to. Is it absolutely critical at this time, or could you wait another month or two? Although a deferral might buy you some time right now, it might also cost you dearly in the long run.
Note, however, that while you may incur additional interest charges if you defer your mortgage payments, this may still be the best option for some families. For example, if you have completely exhausted your savings, it may come down to choosing between a mortgage deferral or putting other bills on your credit card. In a situation like that, the mortgage deferral may indeed be the better choice.
In any case, the key is to take a moment, carefully consider your needs and your own situation, and make sure you have all the info you need so you can make an informed decision. If there’s anything we can help with, contact us to have a discussion with a Portfolio Manager or Certified Financial Planner.