Deferring Mortgage Payments during COVID-19

Deferring Mortgage Payments during COVID-19

The COVID-19 crisis has created a dent in the Canadian economy with almost 3 million Canadians unemployed in the months of March and April alone. To provide a stimulus to the economy, the Canadian government introduced several measures, one of which was encouraging financial institutions to expedite requests for deferral of mortgage payments.

What is a mortgage deferral?

A mortgage deferral is a temporary arrangement in which a financial institution, upon request from a mortgager, decides to delay the mortgage payments. The keyword here is delay, and it should not be construed as waived. The mortgager still must pay the entire interest plus principal after the deferral period is over. Another catch to mortgage deferrals is that the outstanding amount continues to bear interest during this period. So, suppose you have a $1,000,000 outstanding mortgage as of now, and your payments have been deferred by six months. After six months, the outstanding amount would increase on top of the original $1,000,000 plus the interest for six months.

Let us assume that you have taken a $1,000,000 loan today with monthly instalments. The tenure is 30 years and the annual rate of interest is 3%. Using a financial calculator, the mortgage payment would be $4,206.03.

With a six-month deferral, the interest accrued would be close to 1.5% (for simplicity we have halved the annual rate) of $1,000,000, or $15,000. The total value of the loan would now be $1,015,000 and the payments to be made would increase to $4,269.12.

Some banks provide the option to pay off the accumulated interest at the end of the deferral period.

Was this option available before?

While this has come to the limelight in recent months, such options have been provided in the past as well. Take the example of a delay in a credit card payment. In such a case, the bank levies heavy interest on the outstanding amount until it is paid off. While punitive in nature, this is also a form of deferral that has existed for a long time. Such an arrangement has been available for mortgages as well but was only occasionally used until the COVID-19 crisis hit.

Implications of deferring your mortgage

Most people rush to defer their mortgage payments even though they are capable of paying the instalments. There are certain aspects which a mortgager must consider before taking this option:

Increase in instalments in the future: Since the notional amount has been increased due to the interest charged for the deferral period, the instalments that one must pay increases simultaneously. This has been illustrated in the example before.

Impact on credit score: When a user fails to pay credit card dues on time, the credit score is impacted. Deferring mortgage payments may have similar consequences. Many credit information companies would not be able to differentiate a COVID-19 deferral to a normal delay in payment. It is therefore advisable to keep track of this score while opting for a deferral. While the current COVID-19 deferrals are intended to not affect credit scores, as financial institutions are working directly with credit bureaus, there is still risk.

Social Impact: Taking advantage of this option may indirectly impact other people as well. Banks and other financial institutions may not be able to process the request of everyone. Someone who can pay their mortgage could, possibly, seize the opportunity from someone who would really need the deferral during this crisis. It is therefore advisable to manage your financials during this time and take into consideration the impact on other people and make your mortgage payments if you can.

In financial terms, deferring your mortgage may not be a benefit, but it does offer flexibility at a time when liquidity can be tight. Especially for workers who have been temporarily laid off or furloughed but expect to regain employment once the economy starts to reopen. From a financial perspective, though, the deferral should likely only be sought as an option if in short-term financial need.

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