On March 17, Canada’s six largest banks (BMO, CIBC, RBC, Scotia, TD and National Bank) announced that they would work with customers to provide “flexible solutions” to help people manage through the Covid-19 crisis. While they said they would look at everyone’s situation on a case-by-case basis, the highlight of their announcement was that some people could potentially be granted a six-month deferral on their mortgage payments. Naturally, this was welcome news for people who might have lost their job (and 1.55 million jobless claims were filed over the last two weeks) or those who may have contracted the coronavirus and can’t work.
It didn’t take long for a lot of confusing reports to surface. Some people claimed that their deferral request was denied, while experts said that delaying payments would cost homeowners thousands in additional interest and potentially ruined credit scores. So what’s really going on?
First of all, yes, you really can defer your mortgage payments for up to six months. Reportedly, more than 213,000 requests for deferrals have been either completed or are in the midst of processing by the country’s biggest banks. According to Robert McLister, founder of Ratespy.com, a mortgage rate comparison site, all you have to do is call up your lender (be prepared to wait on hold for a while) and ask for a deferral. That’s pretty much it. “There’s not a lot of process involved,” he says. “In most cases, at least for the larger lenders, you don’t need to provide proof that you’ve been adversely affected by the coronavirus.”
While all of the largest banks are willing to postpone payments for six months, some of the smaller non-bank lenders (and many people do have mortgages that are not with the big banks) may only be willing to postpone for two or three months, says McLister. “There are some economic impacts to small lenders and they can be adversely impacted, so it really depends on the lender as to what they’ll do,” he says.
Calculate your additional interest
It’s important to remember that you will have to make those payments at some point and that interest is still accumulating. As well, interest is accumulating on top of other interest, so you could end up paying quite a bit more over the lifetime of your mortgage. How much you’ll pay will depend on how much of a loan you have left, how many months you defer and how many years you have remaining on your amortization.
Using RBC’s Skip a Payment calculator, if you put $2,500 a month towards your mortgage, have 20 years left remaining on your amortization, pay a three per cent rate and defer for six months, you’ll owe an extra $11,508 in additional interest costs over your remaining amortization period.
Unfortunately, RBC’s calculator isn’t perfect in that there are a number of other variables that could increase or decrease that payment. If you’re with the big banks, you may not need to pay that interest back until your term is up – it then gets added to your amount owing – which means that thanks to compounding interest, you could end up paying even more than that $11,508 depending on the length of your term.
Here’s how RBC explains the process on their site:
“There is no fee to skip a payment. When you skip a payment, the interest on the skipped payment is added to your outstanding balance and interest is charged on that amount. This means your mortgage balance will increase. Your payments won’t change during the term of your mortgage. Instead, at renewal your monthly payment amount increases to account for the higher balance.”
Some smaller lenders may increase your payments right after the six months, says McLister, which could then result in less interest paid over your amortization period.
The decision you’ll have to make is whether the additional interest payments are better than the potential for defaulting. “Think about the alternative,” says McLister. “If you don’t make your payments at all, then what’s the cost of that?”
Ask about credit scores
There’s been a lot of confusion around whether deferrals could impact your credit score. In normal times, if you’re delinquent with your payments, then your credit score could take a hit. Now, the expectation is that your lender won’t indicate that a payment has been missed, but a number of experts continue to voice concerns about it.
McLister asked Equifax, the credit monitoring agency, how lenders might treat deferred payments. Here’s their response: “In the event that a data furnisher makes a credit relief or payment deferral program available to its consumers to opt out of making monthly payments during the pandemic, Equifax’s expectation is that the data furnisher would take actions on its system to ensure that it does not report any derogatory/missed payment information to the credit bureaus that is misaligned with the program it has implemented.”
In other words, Equifax expects that lenders won’t register a missed payment as the kind of missed payment that would impact your credit score. Again, companies may be treating this differently, so ask your lender if any missed payments will impact your score.
A mortgage deferral program like this one is unprecedented and, on the whole, it’s great that it’s being offered. However, if you are able to make your payments during the COVID-19 crisis, then you should. With stocks now down, you may be earning a better return on your money by paying down your debt. Plus, you don’t want to pay additional interest if you don’t have to. It’s also just good personal finance practice to pay off your mortgage sooner rather than later.