COVID-19, Mortgage deferral is not the best choice

BY JAY BRIJPAUL

Over half a million homeowners have applied for mortgage deferral. With COVID-19, many lost their jobs and cannot pay their mortgage. The six major banks are assisting by allowing homeowners to defer their payments for up to six months. Mortgage payments may be associated with property tax and insurance fees which must be paid monthly and cannot be deferred. While mortgage deferral is an option, it will cost consumers more.

A mortgage deferral is not forgiven. It is a postponement of paying the mortgage until a certain time. When payment is finally due, must the entire amount be paid? If that’s the case, then, technically after six months we are in default and power of sale proceedings can commence against us. Our only option is to pay up the backlog. There is a second way.

The deferred amount can be added to the remaining balance. Let’s assume that there is a mortgage of $400,000 with a monthly payment of $2,000.00. In six months, we will owe the bank $12,000 plus compound interest. This amount is added to the mortgage and is paid over the remaining term. With an increased principal, the monthly payment will increase unless we extend the number of years we have remaining to pay off the mortgage. Either way, over the lifetime of a mortgage, we are paying much more than we borrowed. Deferral can create an additional problem.

A mortgage is considered as a revolving credit and if it is not paid, there is nothing in place to protect our credit history. It will show up as a missed payment and our credit score will drop. When our credit score drops, our ability to negotiate better mortgage rates diminishes and our capability to secure loans becomes an uphill challenge. If mortgage deferral is your only choice, then, discuss the various options with the lender and get it in writing.

Instead of mortgage deferral, we can tap into our reserve. John was in a similar predicament and instead of postponing his mortgage payment, he tapped into his TFSA. His rational is that the interest he earned on his TFSA is far less than the compound interest he pays on his mortgage. Susan, on the other hand, applied for a Home Equity Line of Credit. She mentioned that it’s like having a giant overdraft protection secured against her home. She can take out if needed and pay only the monthly interest and eventually when things change, she can pay down her line of credit.

COVID-19 lockdown is affecting everyone and if we have to borrow money to survive, let’s be careful. Avoid cash advances from credit cards and pay day loans. The cost of borrowing is high and is not worth it. Some families opt to borrow from their RRSP but be cautious because it is not the best time to sell mutual funds or stocks. By cashing in your RRSP, you are depleting your retirement money. The withdrawal is taxable as well.

Homeownership provides shelter and allows us to build wealth over time. We cannot predict the future, but we can plan for it. Many families have an emergency fund set aside for difficult times. The emergency fund should be enough money put aside for six months for us to live on. It is imperative that this amount should be easily accessible and not locked into other investments.

Landlords are facing a difficult time too. Many tenants are in default and are asking for rent postponement. Landlords who need the rent to pay their mortgage should consider the options above. It is important to have a written agreement with the tenant for postponement of rent. Many landlords worked out an agreement with the tenant to pay partial rent and defer the rest for a specific time.

The courts are closed, and the Landlord and Tenant Board has suspended all hearings but the law remains the same.  It is illegal to switch locks or cut utilities for failure to pay rent. Landlords cannot charge fees or penalties for late payment either. Tenants must be reasonable as well because once the courts are open, landlords can proceed to evict a tenant and garnish their wages.

Let’s face the new reality. It’s time to stop pounding the ground. Let’s get up, dust ourselves off and look ahead. The human race is resilient and becomes stronger after every mishap. We are in this together and must work with each other because, soon, the hands of the clock will point in a new direction.  It’s a new beginning.