Things to Consider Before Opting for a Mortgage Deferral

Over the last few months, there has been a lot of uncertainty surrounding the COVID-19 pandemic and the economy. Millions of people lost their jobs, businesses were forced to shut down, and Canadians coast to coast were required to isolate and social-distance.

While the pandemic has certainly taken a toll on our social lives and on the economy as a whole, it’s also forced many homeowners to question whether they will be able to pay their mortgage.

Luckily, the five largest banks in Canada—Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD), Bank of Nova Scotia (Scotiabank), Bank of Montreal (BMO), and Canadian Imperial Bank of Commerce (CIBC)—have stepped up to offer mortgage deferrals in Toronto and across Canada.

What is a mortgage deferral? And does a mortgage deferral hurt your credit? Here’s what you need to know about this new form of financial assistance from lenders and whether it’s the right move for you and your family.

What Is a Mortgage Deferral?

A mortgage deferral allows you to suspend your mortgage payments for a temporary, agreed-upon timeframe. It is particularly beneficial if you are experiencing a financial hardship, such as unemployment, falling ill, or needing to care for a loved one.

Due to the COVID-19 pandemic, you can defer up to six months of mortgage payments. The program is being offered on a case-by-case basis. In order to qualify, you must have a mortgage in good standing. The goal is to alleviate temporary hardships and lessen the financial burden on Canadians.

Is a mortgage deferral interest-free? The answer is no. It’s important to note that once a mortgage deferral ends (i.e. the six months are up), your mortgage payments will go back to normal and you will be required to make all the payments you missed. The payments will be added to the end of the term of your mortgage, with interest due on the deferred payments.

When Should You Opt for a Mortgage Deferral?

It’s a good idea to opt for a mortgage deferral in Toronto if you or your household have been financially impacted by the COVID-19 pandemic and you might not be able to afford your monthly mortgage payments. If you feel your current financial situation could be long-term, deferring your mortgage payments and reevaluating how you allocate your money is a smart idea.

Mortgages that are CMHC-insured may be eligible for a deferral of up to six months; meanwhile, mortgages that are not insured by CMHC may be eligible for longer deferrals at the lender’s discretion.

What Are the Mortgage Deferral Options?

If you’re considering a mortgage deferral in Toronto, there are a few options available to you:

Discuss with Your Lender

Perhaps the most important piece of advice we could give you is to discuss your financial situation with you lender. They will help you weigh your options and devise a plan that works for your current situation.

They may suggest extending your amortization period, which means increasing the length of time you are required to pay off the remainder of your mortgage. This will typically lower your monthly payments. It’s a good option if you only have a few years left on your mortgage.

Take Out a Line of Credit

If you find yourself in a dire financial situation due to the COVID-19 pandemic, you can also opt to use a line of credit instead of deferring your mortgage.

For those who already have a Home Equity Line of Credit (HELOC), you can withdraw money to help you make mortgage payments until your income situation is resolved. As long as you are able to pay back your HELOC over time, this is a viable short-term solution to help you stay on top of your payments.

Why You Shouldn’t Defer Mortgage Payments

Getting a mortgage deferral in Toronto may seem like a great short-term fix, but there are some drawbacks you need to be aware of.

Just because you are pausing your mortgage payments, it doesn’t mean your lender is pausing your interest accumulation. The longer you defer your payments, the more you’ll end up paying in interest over time.

In some cases, this could mean paying interest on the interest you deferred. Remember: Mortgage deferrals are not interest-free.

Also, unless you extend your amortization period, you’ll now be required to pay off the remaining balance of your mortgage within a shorter timeframe. So, instead of having to pay $50,000 back in 36 months, you now might only have 30 months. Once your payments get recalculated, it may result in a higher monthly payment going forward.

Does a mortgage deferral hurt your credit? Typically, missing mortgage payments would have an immediate negative impact on your credit score. But these are unprecedented times. The onus is on your lender to ensure that customers who have opted for mortgage deferrals in Toronto and the surrounding areas do not suffer a hit to their credit score.

Contact Zinati Kay for Mortgage Refinancing

If you’ve been financially impacted by COVID-19, a mortgage deferral might help alleviate some of the pressure on your finances. But, deferring your mortgage payments should be a last resort and you should only take this route if it’s absolutely necessary.

If you are still able to make your monthly payments, you should. A mortgage deferral is far from a free ride.

If you’re looking to defer or refinance your mortgage, Zinati Kay – Real Estate Lawyers can help. We are a full service residential real estate law firm that offers fixed closing costs to buyers and sellers, when they buy, sell, mortgage, or title transfer their home. With over 25 years of experience in the industry, we can help you understand your options and make the right choice when it comes to your mortgage deferral in Toronto.