What is a mortgage deferral
A mortgage deferral is an agreement between you and your financial institution. It allows you to delay your mortgage payments for a defined period of time.
After the deferral period ends, you resume making your mortgage payments. You also have to repay the mortgage payments you defer. Your financial institution determines how you repay the deferred payments.
This can include:
- extending the mortgage amortization period
- adding the deferred payments to your mortgage balance at the end of your term
- increasing your regular payment amount after the deferral period is over
This means your regular mortgage payments can be higher, depending on how you need to repay the deferred payments.
During the deferral period, your financial institution continues to charge interest on the amount you owe. They will add this amount to your outstanding mortgage balance. With a higher mortgage principal, your interest fees are higher. This could cost you additional thousands of dollars over the life of your mortgage.
If you expect to continue to experience financial hardship once your mortgage deferral period ends, consider your options now.
Who can apply for a mortgage deferral
Financial institutions assess the eligibility criteria for mortgage deferrals on a case-by-case basis.
You may be eligible for a mortgage deferral if:
- you, or any member of your family, are unemployed due to COVID-19
- you, or any member of your family, experience a substantial reduction in income due to COVID-19
- you have an insured or uninsured mortgage
- your mortgage is in good standing
- your home is your principal residence or non-principal residence
Your financial institution’s decision to provide you with relief on certain products is ultimately a business decision.
For information on the actions undertaken by your financial institution during the COVID-19 pandemic, contact them directly. You can also visit their website. Most financial institutions have a dedicated web page with information on their response to COVID-19.
What to expect when you defer your mortgage
Your mortgage payments include the principal and the interest. It may also include your property tax payments and fees for optional insurance products. Deferring your mortgage payments can have an impact on each of these financial commitments.
The principal is the amount of money you borrow from a financial institution. With a mortgage deferral, you don’t pay the principal. Instead, you are delaying the payment of this amount. For example, assume you owe $300,000 in principal at the beginning of the deferral period. At the end of the deferral period, you will still owe $300,000, plus interest.
The interest is the cost you pay to borrow money from a financial institution.
To calculate your interest costs, your financial institution uses:
- your interest rate
- your mortgage principal amount
- the time left to pay your mortgage (your amortization)
When you defer your mortgage payments, your financial institution continues to charge interest on the amount you owe. Your financial institution adds the missed interest payments to your mortgage principal. They add this amount at the end of the deferral period, or each time a mortgage payment is due.
You pay interest on the principal. When you defer your mortgage payments, you pay interest on the new principal amount, which includes the deferred interest. The interest on the deferred interest is called interest on interest. Some financial institutions agreed to refund the interest on interest. If your financial institution calculates interest on interest during the deferral period, ask them if a refund is available.
In either case, your mortgage principal will be higher than before the deferral period. This means you pay more interest over the life of your mortgage. This amount can add up to thousands of dollars over the life of your mortgage.
You may pay your property taxes through your financial institution. This can be a requirement of your mortgage contract, or an option you selected. When your financial institution makes your property tax payments on your behalf, the amount is part of your mortgage payments.
Your financial institution may allow you to defer your property tax payments. If they don’t, you have to continue to pay the property tax portion of your mortgage payments.
Some municipalities offer property tax deferral programs. If you can’t afford your property taxes, contact your municipal office.
Optional credit insurance
You may have opted to buy optional credit insurance. When that’s the case, your financial institution includes the credit insurance fee in your mortgage payments.
Your financial institution may allow you to defer your credit insurance payments. If they don’t, you have to continue to pay the credit insurance portion of your mortgage payments. If you can’t afford your credit insurance, talk to your financial institution.
Cancelling your mortgage deferral early
You may wish to cancel your mortgage deferral before the end of the deferral period. This can be the case if you are no longer experiencing financial hardship or if your financial situation has changed. This can help you reduce the additional interest costs resulting from a mortgage deferral.
Some financial institutions allow the cancellation, others don’t. Contact your financial institution for more information.
If your financial institution doesn’t allow you to cancel your mortgage deferral, consider your options. Many financial institutions allow you to repay the deferred amount without paying a penalty.
You can minimize the cost of additional interest by:
- increasing your payments after the deferral
- making a prepayment
What are your other mortgage relief options
Read your mortgage contract and speak to your financial institution about the options available to you. You may be eligible for one, or a combination of the options offered by your financial institution. Keep in mind that if you make changes to your mortgage contract, you may have to pay fees.
Financial institutions look at situations on a case-by-case basis.
Extending your amortization period
The amortization period is the length of time it takes to pay off a mortgage in full. Extending your amortization period lowers your mortgage payments. Keep in mind that the longer you take to pay off your mortgage, the more you pay in interest.
Your mortgage amortization period may only be extended to the maximum amount, usually 25, 30 or 40 years. This maximum amount depends on whether your mortgage is insured or uninsured. It also depends on your financial institution.
Opting for the blend to term or blend and extend option
Some financial institutions offer blended options. With these options, your financial institution calculates a new interest rate based on your mortgage rate and the current rate. This lowers your mortgage payments if the current rate is lower than your mortgage rate.
With a blend to term option, your new interest rate is in effect until the end of your term. Your mortgage term is the length of time your mortgage contract is in effect.
You may be able to extend the length of your mortgage before the end of your term. This allows you to benefit from your new interest rate for a longer period. Financial institutions call this early renewal option blend and extend.
Converting to a fixed rate
You may be able to convert your mortgage from a variable to a fixed interest rate. If the current fixed rate is lower than your mortgage’s current variable rate, your payments can be lower. This option also protects you if there is a sudden increase in interest rates.
Speak with your financial institution and check your mortgage contract to see if this option is available to you.
Making special payment arrangements
Your financial institution may offer special payment arrangements unique to your situation. With this option, you and your financial institution agree to recover late payments over the shortest period, within your capacity. Special payment arrangements can include reducing your mortgage payments for an agreed-upon time.
Skip a payment
Your financial institution may offer a skip a payment option. This option is similar to a mortgage deferral, but for a shorter period. Typically, with a skip a payment, your financial institution allows you to defer 1 or 2 mortgage payments each calendar year. For more information, read the terms and conditions of your mortgage contract or speak to your financial institution.
Extended mortgage payment deferral
Extended mortgage payment deferrals are for a longer period than the standard deferral period. You may be able to defer your mortgage payment beyond the allowed period.
Usually, you can only defer your payments up to a predefined amount. After you reach this amount, you have to start making your regular payments again.
If you have an insured mortgage, the financial institution needs approval from the insurer before approving your request.
Interest only payments
Interest only payments allow you to defer the mortgage principal. However, you continue to pay the interest on your mortgage. Your financial institution may allow you to defer your mortgage principal up to a maximum amount. They may also require that you repay the deferred principal over a specific timeframe.
This option can significantly increase the cost of your mortgage.
Prepaying and re-borrowing
You may have made prepayments during your current mortgage term. If that is the case, your financial institution may allow you to re-borrow the amounts you prepaid. This amount could help you make your mortgage payments.
Creditor insurance claim
You may have optional credit insurance on your mortgage. If that’s the case, you may qualify for a creditor insurance claim. This can apply if you lost your job or became ill. You must meet some conditions for your claim to be approved. For example, you may not qualify for a claim if your employment relationship is not permanently terminated.
If your insurance company approves your claim, the payments typically start after a waiting period. This is usually 60 days. There may be a maximum monthly benefit. Most financial institutions offer job loss insurance for a maximum of 6 months. There may also be a limited number of months for which your insurance benefits apply. Some financial institutions require that you submit your claim within a limited period, following a job loss.
Check with your financial institution the rules for creditor insurance claims during hardship.
Your financial institution may allow you to add late payments to your mortgage principal. This is often referred to as capitalization. Typically, you can only use this option once during the life of your mortgage.
Your financial institution may allow you to capitalize:
- missed mortgage payments and interest
- property tax payments
- utility bills
- property repair costs
- condo fees
- other outstanding charges
Keep in mind that this can significantly increase the amount you owe on your mortgage. With the capitalization option, your mortgage payments are modified to reflect the increase to your mortgage principal. This means your mortgage payments can be higher.
Home equity line of credit (HELOC)
HELOCs are revolving credit. You can borrow money, pay it back, and borrow it again, up to a maximum credit limit.
A HELOC has a variable interest rate. HELOCs typically allow for interest-only payments, which may seem like a good option. However, using a HELOC to make your mortgage payment can put you at risk.
At any time, your financial institution could decide to lower your HELOC limit. They can also ask you to pay the difference immediately.
Sale by borrower plan
With this plan, your financial institution allows you to sell your property for fair market value to a third party. You continue to live in your home while it’s for sale. This is typically for a period of 90 days or less. During this time, you agree to occupy and maintain the home. You may need to continue to make payments or partial payments toward the mortgage.
Mortgage insurance tools
If your down payment was less than a 20% of your home’s purchase price, you had to get mortgage insurance. This insurance protects the financial institution in case you can’t make your payments. There are 3 mortgage insurance providers in Canada. They have programs in place to help you if you are having difficulty making your mortgage payments.
Learn more about the programs offered by the mortgage insurance providers:
Check your mortgage agreement to see which mortgage insurance provider is associated to your mortgage.
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