Today, many Canadians find it difficult to keep up financially due to the COVID-19 pandemic, which has caused many to lose their income or their jobs. The prices of many things have gone up and some are now being forced to go into mortgage arrears.
If you had signed your mortgage years ago you could not have predicted such an unprecedented global event and now you have to adapt. The biggest fear for many borrowers is to go into arrears and lose their home.
However, there is good news. Banks are well aware that people’s financial situation can change unexpectedly, especially in times like these. Therefore, there are several options open to you if you need additional support. In this article, we discuss the current state of mortgage arrears in Canada and the options available to those in financial distress.
Canada is slowly starting to recover after an explosion in mortgage arrears
If you are in arrears with your mortgage, know that you are not alone. In October 2020, Canada’s mortgage delinquency rate peaked at 1.59%. This is the highest rate of delinquency in Canadian history, after peaking in the 1980s. In an effort to help borrowers during the pandemic, banks and lenders offered many mortgage deferrals. In addition, the rate of mortgages issued rose sharply.
We’ll go into more detail about deferrals and renewals below, but one thing that’s important to know is that they work for the most part. Data from Canada Mortgage Housing Corporation now shows that of the mortgages that were deferred in 2020, the vast majority of deferred payments ended and were able to continue payments again. In addition, the number of renewals on insured and uninsured mortgages is decreasing.
The numbers for delinquent mortgages are now on their way back from the peak. In general, the percentage of arrears can be an indicator of economic health. This means that a lower delinquency rate indicates that more Canadians are in sound financial position and that our economy is recovering from recession.
How Excess Mortgage Loans Endanger Canadians
The ratio between the value of Canadian mortgages and the income of borrowers has been high for years. That means that today a large part of a household’s disposable income goes to their home. This was not helped by the recent rise in house prices.
Unfortunately, this carries a financial risk for the borrower. A small margin between income and the value of mortgages leaves little room for maneuver when financial pressures arise. This means it’s easier than ever for Canadians to not track payments.
This is one of the reasons the government has instituted the mortgage stress test, to ensure that lenders are protected from borrower arrears. Therefore, mortgages with a down payment of less than 20% must also be insured.
What to do if you are in financial trouble?
The most important thing you can do before you are in arrears is to try to reduce your costs and contact your lender. Be candid and honest about your current situation and ask what arrangement you can make based on what you can afford.
Lenders are more likely to help you come to an arrangement if you contact them before you are in arrears. Therefore, if possible, do your best to contact them before you miss any payments.
If you are unable to reach a solution with your lenders, the next step is to consult a lawyer or credit advisor. They can help you research alternative solutions that may be available.
Common options to avoid payment delays
Deferral of payment on mortgages
Mortgage deferral is a special agreement that mortgage owners can enter into with their bank when they are unable to pay their regular mortgage payments. The postponement lasts for an agreed period, during which time you do not have to pay anything.
Once the period is over, you will start paying your mortgage payments again and will be responsible for paying off any missed payments and interest. As a result of the postponement, your regular payment or repayment term will probably have to be adjusted.
If you expect financial hardship to be a temporary situation for you, a reprieve can help you in no time. If you are likely to continue to experience hardships after your deferment has expired, this may not be the best option for you.
Factors Financial Institutions Consider Eligibility
Some of the factors that financial institutions consider when deciding whether you qualify for a mortgage deferral include:
- Are you or your family unemployed due to the pandemic, or have you suffered a significant loss of income as a result of the pandemic?
- Is your mortgage insured or uninsured?
- Is your mortgage in good shape?
- Is the house your main residence or not?
What to expect from a postponement?
Postponement of payment can have major consequences for your mortgage. The effects of delay can affect your payments, your interest and your mortgage payments.
If you delay your payments, you are essentially keeping the same principal on your mortgage as it accrues interest. At the end of the deferment, you still have to pay the same amount plus any additional interest.
The bank will collect your deferred interest in arrears by adding it to your mortgage principal, which is then used to calculate your future interest payments. This basically means that you may pay interest on interest after your deferral.
Some mortgage plans include the payment of property taxes in their regular bills. Some deferral options allow you to defer your property tax payments along with your mortgage payments. Other plans require you to continue paying property taxes while you have deferred payments.
In addition, your municipality can offer deferment of real estate tax.
Extension of the repayment period of your loan
By extending the repayment period of your loan, you are essentially agreeing to pay it off over a longer period of time in exchange for a lower regular payment. Depending on your situation, you can extend up to a limit of 25, 30 or 40 years. The exact length available will differ between insured mortgages and uninsured mortgages.
Keep in mind that the longer your period, the longer you pay interest. This option may save you money on payments, but it can add up to thousands of dollars in interest.
Switching to a mixed or extended mortgage
With a mixed mortgage you can take advantage of the current, possibly lower interest rate at your financial institution. Now they will not immediately give you a lower interest rate. Instead, they will mix your current rate with the lower rate, hence the name. Unfortunately, this option is only available if there is a better rate to combine with. In addition, you can often extend the term of your mortgage to take advantage of the lower rate for longer.
Locking in at a fixed rate
If you have a variable rate mortgage, you can choose to convert it to a fixed rate. Technically, you can do this at any time as a safety measure to protect yourself from fluctuating floating interest rates, but it will only save you money if you stick with a fixed rate lower than your current floating rate. If you decide to use this option, make sure to act quickly as rates can change frequently.
Some lenders offer extended mortgage deferrals. This allows you to defer your mortgage payments for longer, usually until you reach a certain dollar value in deferred payments. For borrowers with insured mortgages, your bank needs approval from the insurer before offering an extended deferment
Skipping a payment, making special arrangements, or interest-only payments
Your bank may offer other payment options that do not allow for a complete deferral of payment. One of those options is to skip just one or two payments. This is essentially like a mini-procrastination. Another option is to agree to temporarily lower your payments, without stopping them altogether. A third option allows you to pay only interest for a period of time, while deferring principal to pay later.
Capitalization is a process where you can take a late payment and add it to your principal. Capitalization isn’t just for mortgage payments and interest. Your lender may allow you to capitalize on other bills such as utility bills, property repair costs, property tax payments, and more.
The downside to this option is that your principal will go up and your payments will go with it.
Home Equity Line of Credit (HELOC)
With a HELOC, you can borrow and repay credit against your home’s equity. HELOCs have a variable interest rate and the credit limit can also change at any time, so they are not the best option for paying mortgage payments.
Options other than working with your lender include getting a loan or help from family, renting out a portion of your home for additional income, selling valuable assets to raise money, or taking on a second job.
It can be a stressful and terrifying situation to be behind on your mortgage payments. The biggest takeaway is to remember that many people have been ahead of you. That is why lenders have taken many measures to help you recover in difficult times. If you are in this position, talk to your bank as soon as possible about the best options for you.