Is a Mortgage Deferral Right for you?
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By Taz Rajan, Updated by Bromwich+Smith Staff | 1216 words | Reading Time: 6 minutes | Last Update: 2024/03/14
Sometimes financial stress is caused by a situation that is going to be temporary. In this case, one option that may be helpful is a mortgage deferral. This article will help you to determine if a mortgage deferral is right for you.
What does deferral mean?
To defer means to postpone to a later date. In a mortgage deferral, essentially you are postponing several months of mortgage payments. It’s important to note that deferral is not forgiveness of those payments all together. Deferral means that at some point in the future, the principal and interest payments of your mortgage during the deferral period will be due. Also, with most lenders, the interest will continue to compound over that period as well.
Is deferring your mortgage payment right for you?
Before jumping on the mortgage deferral band wagon, we recommend you ask a few questions and examine your overall financial picture.
Is there a mortgage payment deferral being offered by my lender for my property? If I’m a landlord, do I qualify?
How exactly does the deferral work? What is required from me? Are there qualification rules?
How will those deferred payments be charged back to me? Will there be a balloon payment when I sell my property, or will I need to make up those payments at the end of six months? What are the repayment terms?
Do I have the option to only defer principal payments and continue making interest payments?
Is there a difference between a skipped payment and a deferred payment? Can I use my skip payment option in conjunction with or instead of the deferred payment?
If you decide to take advantage of the payment deferral option, keep these key points in mind:
*Every lender will review a request for deferral directly with the client and on a case-by-case basis.
*The sooner you get in touch with your bank, the more options you will have available.
*Don’t wait until the second or third month of trouble before reaching out.
*Be honest and open with your situation.
Mortgage deferrals increased during the COVID-19 pandemic due to Government programs. Now that most of the pandemic-era policies have reached their end, deferral terms are likely to be less favourable to consumers.
Mortgage insurance companies such as CMHC (Canada Mortgage and Housing Corporation), Genworth and AIG, have several other default management tools available. These include payment deferral, loan re-amortization, and other special payment arrangements. All assistance options will be considered on a case-by-case basis. For a complete contact list of banks and mortgage lenders visit: https://yourmortgageyourway.ca/blog/keeping-you-informed-covid-19/
“Mortgage deferrals are a step in the right direction to helping Canadians who have been laid off temporarily and are wondering how to manage their mortgage payments. But it is important to understand the implications of choosing this option” said Taz Rajan, Business Development Manager at Bromwich+Smith. “We wouldn’t want to see this option simply delay the financial issue rather than provide some relief to Canadians. This means, Canadians need to take the time to understand the terms – it is not a skipped payment. It is a deferral down the line.”
How many Canadians defer mortgage payments?
During the COVID-19 deferral period, there was an influx of Canadians choosing to defer their mortgage payments. Based on data from the Canadian Bankers Association, approximately 760,000 individuals, which accounted for around 16% of residential mortgages, delayed at least one mortgage payment. When we include the number of deferrals offered by non-bank mortgage lenders, the total number of Canadians who took advantage of the opportunity to skip a mortgage payment was closer to 1 million.
What happens if I am unable to resume my mortgage payments?
The first step after it has been determined that you are unable to resume your mortgage payment is to immediately contact your mortgage lender. Your lender will try to work with you to find a solution and avoid foreclosure. These options could include:
Government assistance programs: Depending on your situation there may be government programs available to you.
Refinancing: Your lender may be willing to modify the terms of your mortgage which could include reducing the interest rate, adding missed payments to the end of your term, or extending your term.
Repayment: Your lender may create a repayment plan by adding a portion of the missed payments to your current payments until all outstanding costs have been recovered.
Selling the property: If you and your lender are unable to come to an agreement your lender may initiate foreclosure proceedings resulting in the sale of the property to recover any outstanding debt.
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What are the consequences if I continue to default on my mortgage payments?
If you continue to default on your mortgage payment there may be severe consequences. Your lender can start the process of foreclosure which enables your lender to take possession of your property and gives them the power of sale. This will be reflected in your credit score and could make it difficult for you to find new housing options. A foreclosure will put your lender in the power seat as you will lose any equity that you have built up in your home and will not have the ability to determine how much the house should be sold for or the timeline of when it is sold.
It is important to know that there are options. You can ask your lender for an extension which they have the choice to accept or decline. Another option is to extend the amortization period of your mortgage to lower your monthly payments. In Canada the maximum for insured mortgages is 25 years and uninsured mortgages can be extended to a maximum of 30 years. Be aware your lender may charge penalty or costs. Other options available to you are financing your payments through a HELOC or line of credit. This option should only be explored if you are confident that you will be able to resume regular mortgage payments in the future as relying on unsecured loans may be risky.
What happens after the deferral period?
After the deferral there are several repayment options available. For example, your new mortgage payments could be higher based on a few key factors. These factors will include the size of your mortgage, the duration remaining in your current amortization and your current interest rate.
If you find yourself struggling with mortgage payments, consider a free, no-obligation consultation with a Licensed Insolvency Trustee. A LIT will be able to guide you through restructuring any of your nonmortgage related debt through federally regulated debt relief programs like a Consumer Proposal. You may find that after your other debt has been removed, you're able to resume payments on your mortgage.
Keep in mind that your debt it will continue to grow due to late penalty charges, fees and interest charges, so it is important to reach out to an LIT sooner rather than later.
Bromwich+Smith has a number of debt relief strategies to help you regain control of your finances and get your life back on track. Reach out today for a free, confidential, no obligation consultation. Bromwich+Smith’s Debt Relief Specialists are available by phone at 1.855.884.9243, Live Chat or you can request a call back at contact us page. We want to see you flourish!
By Taz Rajan Community Engagement Partner at Bromwich+Smith
Taz has been in the finance industry for nearly 2 decades and has always been passionate about education and empowerment. Having declared bankruptcy herself, she intimately understands the shame, stigma surrounding matters of debt as well as the joy and relief that comes from restructuring. Taz actively works to normalize the conversation of debt through blogs, media interviews, webinars, lunch & learns and through building relationship.