Mortgage Deferrals; What’s Next?

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As we begin the first fall of the decade, the 6 month vacation thousands of Canadians have taken from their mortgage payments will be over.

Since the end of June, 760,000 people had put their mortgages on pause, according to the Canadian Bankers Association. And for a big portion of them, the grace period will close in the last few months of 2020.

The mortgage deferrals, which the government has actively facilitated, were meant to help households stay financially afloat during a period of temporary unemployment. The hope was the labour market would have significantly recovered by the time the deferrals would start to expire.

However, for a good portion of people, that might not be the case. So what do they do if payment resumption isn’t an option?

Experts believe there are 2 options:

If it looks like there’s going to be only a short gap between when your payments are set to restart and when you’ll be able to go back to work, there are a number of possible options.

Borrowing from a line of credit, if you have one, to make your mortgage payment “may be totally fine” to paper over something like a one-month gap, says Shannon Lee Simmons, a Toronto-based financial planner and best-selling personal finance author.

However, she adds, “if you’re not sure if you’ll be able to pay for your mortgage month after month, that could be a slippery slope.”

Another possibility is calling up your lender and asking if they might extend the deferral period.

“Your existing lender is incentivized to work something out with you because they need to get their money back somehow and the easiest way of doing that is getting it from the existing borrower,” an expert says.

In that vein, your lender may also be open to stretching out your amortization period, if there is a “reasonable probability” you’ll be able to make smaller payments, they add.

Spreading your mortgage over a longer time horizon lowers your monthly payments, although it also increases the interest you’ll pay over the life of the loan.

“If you’re in a situation where cash flow is significantly lower, extending amortization for one term could help make ends meet until you know your income trajectory for the long run again,” says another expert.

And while paying more interest on your mortgage isn’t ideal, a longer amortization can help you avoid racking up more expensive debt and keep your home, she adds.

Refinancing your mortgage to take advantage of lower rates, however, isn’t an option. Other lenders will be leery of taking on a distressed loan, he says. And current penalties for breaking fixed-rate mortgages tend to be very steep, he adds.

If you can’t see yourself being able to restart your payments any time soon, it’s unlikely your lender will go for either a further deferral or a longer amortization.

While this is a difficult situation, it’s important to start researching options like selling the house or filing a consumer proposal.

With a consumer proposal, borrowers can reduce their non-mortgage debt and keep their home, as long as they’re able to keep up with mortgage payments.

“Gathering information doesn’t mean you have to sell or file a consumer proposal. It’s just helping you know and explore all your options if your entire income has been wiped out,” an expert adds.

And whatever you do, do not wait until you’ve actually missed a payment without having talked to your lender, Laird warns.

“When you start missing payments, that’s when you are giving the lender the legal option of foreclosing on your property,” he says.

It’s always better to sell your home yourself than to have the bank do it for you, he adds.

A number of lenders have said a significant share of mortgage deferral applications have come from people who, while able to pay, wanted to free up cash to build an emergency fund.