Understanding How to Defer Your Mortgage Payment
With the current state of emergency, many homeowners have been left trying to pay their regular bills on a reduced income – or in some cases, no income at all. More and more Canadians are looking into how to defer your mortgage payment as a potential solution to this unexpected financial challenge.
Homeowners stressing about making ends meet may be eligible for the new mortgage payment deferral program being developed in collaboration by the banks, the federal government, and the Canada Mortgage and Housing Corporation.
Nearly 600,000 Canadians have so far taken advantage of some form of mortgage deferral assistance due to the COVID-19 crisis, according to the Canadian Bankers Association (CBA). Canadian Mortgage Trends, April 2020
You can apply for the COVID-19 mortgage deferral program as long as your mortgage is in good standing; currently, over 90% of Canadians who have applied for a deferral have been approved.
The first step is speaking to your bank or mortgage broker. The program is currently available until at least June 30th, 2020.
What does it mean to defer your mortgage payment?
It’s not an ideal situation, but you may choose to defer your mortgage payment in times of financial stress that you cannot foresee or control.
Getting laid off unexpectedly, prolonged economic instability, industry disruption, or a sudden state of emergency can all prompt a person to seek financial relief.
But how does the mortgage deferral actually work?
- “Deferral” is the term for the agreement between yourself and the lender, typically your bank.
- The mortgage payment deferral (sometimes known as a mortgage forbearance agreement) states that you and your lender have agreed to put a pause on mortgage payments for a set period of time.
- This is only temporary.
- Once the set period of time is over, you must return to your regular monthly mortgage payments.
- You must also repay the missed payments in addition to the accumulated interest during the deferral period, which can amount to approximately $2,400 CAD for a six month period.
Are my deferred payments erased?
The mortgage deferral agreement doesn’t remove the amount you owe on your mortgage, it merely defers it until the time period is over (hence the name.)
Once the agreement comes to an end, you must continue your mortgage payments, repay the missed payments, AND pay the additional interest from the deferral period.
For many Canadians, this brings about one big question – is deferring my mortgage payments worth the extra expense?
How do I repay my missed mortgage payments?
How you repay your missed payments and additional interest depends on your specific lender and should be outlined in your deferral agreement.
For example, the missed payments and interest could be added to the entire amount owing, increasing your regular monthly mortgage payments by a marginal amount.
What does it cost to defer my mortgage payments?
It’s important that you understand there is a cost that comes with deferring your mortgage payments. Simply put, the longer you defer your payments, the more accumulated interest you will pay.
Let’s break down the numbers so you can compare your own situation to this example:
- A couple purchased a detached home in Waterloo in February 2020
- They paid $540,000, the average cost of a detached home in Canada
- They were both laid off due to state of emergency closures and had to defer their mortgage payments immediately
- Mortgage: $400,000 CAD
- Interest rate: 3%
- Amortization period: 25 years
How much additional interest will they have to pay?
- After one month deferral: $416.05 CAD
- After two months deferral: $826.82 CAD
- After three months deferral:$1,235.00 CAD
- After four months deferral: $1,638.48 CAD
- After five months deferral: $2,037.71 CAD
- After six months deferral: $2,443.00 CAD
Is this the right option for me?
You need to weigh your options to decide if taking on the additional interest is worth putting off payments for a few months.
Ask yourself questions like:
- Will you be employed six months from now?
- Will you be more or less financially stable six months from now?
- Will you be able to make your mortgage payments six months from now?
- Do you have a significant other who is employed?
- Do you have other large, necessary expenses that take precedent?
- Do you have any large expenses in the foreseeable future? (i.e. a baby)
The average mortgage in Canada is $1,326.00, so over a six-month period it could spare you almost $8,000.00. Try to explore any and all potential solutions before committing to this option.
Are there other solutions?
Deferring your mortgage payments might not be the right option for you. So what else can you do?
- Change from bi-weekly payments to monthly payments (this can save you money on your monthly payments.)
- Extend your amortization period (you can extend it back at least as far as your original amortization, i.e. if you had 19 years left on a 25 year mortgage, you could extend it back to 25 to lower payments.)
- Do you have any family members who would be willing to make a personal loan?
- Do you have any savings or investments you can use to avoid deferring payments and replace in the future?
If you’re concerned about the current real estate market or have more questions about how to defer your mortgage payments, you can always reach out to our easy Home Realty team for answers.