Homeowners in Canada who are unable to stay up-to-date with their monthly mortgage payments are being offered the option to defer their payments by the Government in conjunction with the CMHC and Canada’s top banks. Since deferrals imply that interest accrued is added to the mortgage balance, they should only be used in dire circumstances.
How is the COVID-19 pandemic influencing the economy?
The economic impact of the coronavirus pandemic is being felt across the world. Although many have predicted the possibility of recession in the near future, COVID-19 further increases the risk of a global recession. A clear indicator of the impact of COVID-19 on the economy is the U.S. stock market, which has recently entered into a bear market due to stocks falling more than 20%. This has raised a lot of concerns about how regular functions, such as monthly mortgage payments and loan repayments are to be carried out, especially with imminent lockdowns in several countries.
Thankfully, governments around the world are providing citizens and corporations with relief packages. In the United States, the United Kingdom, Australia and Canada, economic stimulus packages have been rolled out to help residents cope with the ensuing economic downturn.
Fiscal and monetary stimulus measures have been endorsed by central banks all over the world in response to this global health crisis, including the Bank of Canada. To provide some form of mortgage relief, Fannie Mae in the US has ordered for flexibility of mortgage plans by lenders, allowing a suspension of mortgage payments by up to 12 months. This is in addition to other measures such as payment of $1200 to each U.S. citizen to help navigate through the pandemic. Countries like Australia and the United Kingdom have also rolled out billions of dollars in stimulus packages to help deal with the pandemic.
What is the Canadian government’s response to the economic implications of COVID-19?
In the Government of Canada’s initial Economic Response Plan to the COVID-19 pandemic, $55 billion was budgeted to take care of tax deferrals and other financial provisions, while $52 billion was to be disbursed as direct support to Canadian workers and businesses. On March 27, 2020, the economic stimulus package was increased to C$202 billion in total.
As of March 25th, 2020, the Canadian Government launched the Canadian Emergency Response Benefit (CERB), which provides $2000 monthly to qualifying Canadians workers for a four-month period. To qualify, individuals must have lost their jobs due to the pandemic, stayed home without pay to take care of children, or have significantly reduced working hours. This program is designed for individuals who would not otherwise be eligible for employment insurance or sickness pay. A 75% subsidy for small businesses and access to one year interest-free loans has also been announced to help these businesses get through this crisis, with specific details expected to be announced on the 30th of March, 2020.
As well, the Canada Revenue Agency has announced that filing due dates for 2019 tax returns have been extended until June 1st, 2020 for individuals and May 1st, 2020 for trusts.
An Insured Mortgage Purchase Program is to be launched by the Canadian Government, through which over $150 billion insured mortgage pools will be purchased via the CMHC. This will provide stable funds to banks and mortgage lenders, thus increasing the liquidity of Canada’s mortgage market.
Market liquidity will also be bolstered by the Bank of Canada, which has announced its adjustment of market liquidity operations to maintain proper market functions and credit availability. Some of the measures announced by the Bank of Canada to provide monetary stimulus for the economy are:
- Lowered interest rates by 1% in March
- Expansion of bond-buying and repurchase agreement operations (repo)
- Widening of the collateral base for repo operations
- Increased purchases of mortgage-backed securities
Canada’s financial regulatory body, the Office of the Superintendent of Financial Institutions has also lowered bank reserve requirements, to support additional lending of over $300 billion by domestic banks.
The Canadian Mortgage Deferral Program: how it works
One of the Canadian Government’s strategies to help residents through the COVID-19 pandemic is by providing a mortgage deferral program. Many Canadian homeowners have either experienced job loss or reduced work hours, which has affected their monthly income significantly. As a result, millions of Canadians are worried about how to pay their mortgage. This is why a mortgage deferral program has been put in place for up to 6 months.
Also known as the mortgage forbearance agreement, the mortgage deferral program is an agreement between a homeowner and their mortgage lender to suspend mortgage payments over a certain period, after which mortgage payments resume as normal.
It is important to note that the Mortgage Deferral Program does not cancel or erase the amount owed on mortgages and that any interest not paid during the deferral period is added to the outstanding principal mortgage payment. Once the agreement period has elapsed, all missed payments, including the principal and any accumulated interest will be repaid.
Repayment of deferred amounts vary, and is dependent on the lender and specific situations surrounding the deferred payments. Once repayments start, the amount to be paid would be based off the total amount owed and follows the regular payment schedule.
What happens if you have an outstanding mortgage payment of $100,000 at a variable rate of 2.95% prime rate, with a monthly payment of $1,000, and you choose to defer payment for 6 months? Once the 6 months have elapsed, your principal payment would be $100,000 + $1,475 = $101,475. However, if the Bank of Canada lowers the overnight lending rate to zero, banks can lower their interest rates for homeowners. At the moment, it is recommended to continue making your payments, if it is financially feasible, because it would help reduce your outstanding debt.
The roles of CMHC and Canada’s big banks in mortgage deferrals
The Canada Mortgage and Housing Corporation is allowing lenders to offer deferred payments for up to 6 months for insured mortgages. For mortgages that are not insured by CMHC, individual lenders must be contacted to determine what options are available. The CMHC president has also made it clear that this is only a deferral, not a general amnesty, and mortgage payments are still owed to lenders.
Mortgage deferral plans have been endorsed by Canada’s big six banks: the Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC), National Bank of Canada, Bank of Montreal (BMO), Scotiabank and TD Bank. Mortgage deferrals will be granted on a case-by-case basis for those disrupted financially by the COVID-19 pandemic.
Will deferred payments affect credit scores?
It is important to note the implication of using the mortgage deferral program on one’s credit scores. Equifax, one of the major credit bureaus in Canada, has stated its commitment to helping Canadians through the COVID-19 pandemic, and states that lenders should ensure that missed/deferred payments aren’t reported to credit bureaus in a misaligned manner to the implemented deferral program. Creditors aren’t expected to punish consumers for using a deferral program, but is this expectation really enough?
From April onwards, lenders will continue updating payment history of credit accounts electronically to Equifax and TransUnion, but will not report deferred payments as late payments. As a result, lenders would need to ensure that any missed payment information isn’t reported to the credit bureaus.
Based on this information, lenders will not report missed payments, but that still puts your credit score at risk because no one knows for sure if the reports will appropriately evaluate deferred payments. A reduced credit score will make it harder to qualify for best-rate financing opportunities, discounted insurance premiums, or even certain employment opportunities. Furthermore, it will take several months or years for your credit score to recover from the effects.
If you are planning to use the mortgage deferral program, you can protect your credit score by doing the following:
- Getting a written/electronic confirmation of the payment deferral
- Requesting for specific identification information of the service representative that confirms your deferred payment, and noting the day and time when this confirmation came through.
- Keeping all payment deferral documentation safely
- Diligently tracking credit reports – from both TransUnion and Equifax over the next 6 months
- If you notice an error on your credit reports, reach out to both the credit reporting agencies and your lender to open a dispute.
When should you use the mortgage deferral program?
The Mortgage Deferral Program should only be used if you are struggling to make monthly mortgage payments. This is because you will have to pay the accrued interest on your mortgage when you resume repayments, in addition to the accumulated mortgage payments. Therefore, if you have a consistent revenue stream and sufficient emergency funds, you should not use the mortgage deferral program. However, if you are at risk of losing your job and don’t have sufficient cash reserves to cover monthly payments, this program may be helpful for you.