As the summer turns into fall, the six-month vacation thousands of Canadians have taken from their mortgage payments will be over.
As of the end of June, 760,000 people had put their mortgages on pause, according to the Canadian Bankers Association. And for a significant portion of them, the grace period will close in the last few months of 2020.
The mortgage deferrals, which the government has actively facilitated, were meant to help households stay financially afloat during a period of temporary unemployment. The hope was the labour market would have significantly recovered by the time the deferrals would start to expire.
But what happens if your deferral period is about to end and you can’t afford to resume payments?
There are two main scenarios, according to the experts.
If you’ll be able to make payments soon
If it looks like there’s going to be only a short gap between when your payments are set to restart and when you’ll be able to go back to work, there are a number of possible options.
Borrowing from a line of credit, if you have one, to make your mortgage payment “may be totally fine” to paper over something like a one-month gap, says Shannon Lee Simmons, a Toronto-based financial planner and best-selling personal finance author.
However, she adds, “if you’re not sure if you’ll be able to pay for your mortgage month after month, that could be a slippery slope.”
Another possibility is calling up your lender and asking if they might extend the deferral period, says James Laird, president of mortgage brokerage CanWise Financial.
In that vein, your lender may also be open to stretching out your amortization period, if there is a “reasonable probability” you’ll be able to make smaller payments, Laird says.
Spreading your mortgage over a longer time horizon lowers your monthly payments, although it also increases the interest you’ll pay over the life of the loan.
“If you’re in a situation where cash flow is significantly lower, extending amortization for one term could help make ends meet until you know your income trajectory for the long run again,” says Lee Simmons.
And while paying more interest on your mortgage isn’t ideal, a longer amortization can help you avoid racking up more expensive debt and keep your home, she adds.
Refinancing your mortgage to take advantage of lower rates, however, isn’t an option, Laird warns. Other lenders will be leery of taking on a distressed loan, he says. And current penalties for breaking fixed-rate mortgages tend to be very steep, he adds.
If you can’t see a way out
If you can’t see yourself being able to restart your payments any time soon, it’s unlikely your lender will go for either a further deferral or a longer amortization, Laird says.
While this is a difficult situation, it’s important to start researching options like selling the house or filing a consumer proposal, Lee Simmons says.
With a consumer proposal, borrowers can reduce their non-mortgage debt and keep their home, as long as they’re able to keep up with mortgage payments.
“Gathering information doesn’t mean you have to sell or file a consumer proposal. It’s just helping you know and explore all your options if your entire income has been wiped out,” Lee Simmons says.
And whatever you do, do not wait until you’ve actually missed a payment without having talked to your lender, Laird warns.
“When you start missing payments, that’s when you are giving the lender the legal option of foreclosing on your property,” he says.
It’s always better to sell your home yourself than to have the bank do it for you, he adds.
If you deferred payments to build a cash cushion
A number of lenders have said a significant share of mortgage deferral application have come from people who, while able to pay, wanted to free up cash to build an emergency fund.
Lee Simmons says if you can afford your mortgage payments, you may want to leave that rainy-day money untouched for a bit longer.
“This situation still has so many unknowns. If you’re worried about job security, hang onto the emergency account for now,” she says.
“Once things settle down for you,” she adds, “you can hopefully put a lump sum onto mortgage to pay it back down.”View link »