Appearance before the Standing Committee on Finance (July 7, 2020): Mortgage payment referrals

Issue

Payment deferrals typically result in the interest portion of the deferred payment being added to the outstanding balance (capitalized) and interest is charged on interest (compounded). Most deferrals will end in the fall of 2020 and borrowers continuing to face financial hardship may not be aware of all their options.

Background

• Prior to the COVID-19 pandemic, Canadians faced high levels of indebtedness, resulting in greater household vulnerability to financial and economic shocks. 
• The COVID-19 crisis has made it harder for Canadians to service their debts (e.g. due to layoffs, health emergencies, etc.)
• At the Minister’s request, banks widely and rapidly extended the option to defer mortgage payments for up to six months. Many consumers opted for this program beginning in March.
• With deferred payments, the outstanding mortgage increases, and in many cases, the cost of borrowing (amount of interest charged during the term) also increases.
• Banks earn additional revenue on deferred payments when interest is capitalized.

Data/Quick facts

• Over 735,000 mortgage payment deferrals have been approved by regulated entities (RE) since the program was launched (as of June 19: 735,693).
• 60% of these mortgage payments are deferred for the maximum period of 6 months (as of June 19: 436,368) and 40% of the mortgage payments are deferred for less than 6 months.
• FCAC verified with the big banks and found that half (three of them) are charging interest on interest.
• The average additional cost to consumers for interest on interest is $35 - $75 for the average mortgage over six months.
• The US passed a new law  - the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) – where any insured mortgage must be granted payment relief with no additional interest, fees or penalties.

Key messages

• FCAC has information on mortgage deferrals for Canadians on the COVID-19 consumer education page: Managing Financial Health During Challenging Times.
• FCAC is aware of the concerns surrounding some banks charging interest on interest for COVID-19 mortgage deferral relief measures.
• FCAC’s role is to monitor bank’s compliance with their public commitments on relief measures and ensure they meet their disclosure obligations by presenting information in a manner that is clear, simple and not misleading and by providing the borrower with a record of the changes to the credit agreement, in writing, within 30 days of the changes taking effect.
• FCAC is developing further information on mortgage deferrals to assist consumers in understanding their financial options once the deferral period winds down.