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COVID-19 and your mortgage: know your options

The situation surrounding the COVID-19 pandemic is unfolding rapidly. The most reliable information and latest news can be found at the Government of Canada and CMHC websites.

The uncertainty surrounding the COVID-19 pandemic is cause for concern for many reasons. If you’ve been required to go into self-isolation or lost hours at work due to illness, closures, or child-care responsibilities, you may be worried about whether you will be able to pay your mortgage.

What’s the government doing?

Early on, the Federal Government pledged to support Canadians through the COVID-19 response, though it did not take any direct action to change or freeze mortgage payments. Instead, the government took steps to make it easier for Canadians to work with their mortgage lenders, including a behind-the-scenes move to free up options for banks, by purchasing up to $50-billion in insured mortgage debt.

In addition, both federal and provincial governments across Canada rolled out income replacement measures for both employers and individuals. For individuals, schemes like the Canada Emergency Relief Benefit (CERB) aimed to replace at least some income for people that have lost it (you can start an application for the CERB here). For companies, the federal government offered 75% wage subsidies to firms that saw significant drops in revenue due to the crisis.

For information on the general financial support packages the federal government has announced, check this webpage.

What’s the mortgage industry doing?

Throughout March, the Bank of Canada announced a series of rate cuts that have brought the target for the overnight rates to a historic low of 0.25%. These started with the March 4th rate cut, followed by cuts on March 14th and March 27th. In April, the Bank of Canada interest rate held steady at 0.25%, and the central bank indicated this was the “effective lower limit”. For the most part, mortgages lenders passed these rate cuts on in full (by dropping their prime rates) although posted rates have risen since their lowest point in late March. As of May 25th, prime rates are currently at 2.45%.

On Wednesday 18th March, six of Canada’s largest banks announced they would be allowing mortgage payment deferrals of up to six months. These included RBC, TD, BMO, Scotiabank, CIBC, and National Bank. The banks also announced they would offer “opportunity for relief” on other credit products. Many smaller mortgage providers are also offering this – contact your lender to check. As of April 3rd,over 500,000 requests for mortgage deferral had been processed or completed. We’ve heard from many customers having trouble getting onto their lenders during this time, as a result of the increasing demand for their services.

During the week beginning 23rd March, there was still confusion about how these mortgage deferrals would operate. Questions on whether banks would continue to charge interest on the mortgage, or whether deferrals would affect credit scores largely remain unanswered. The Financial Consumer Agency of Canada has announced it will be closely watching bank’s offer to defer mortgage payments.

If you think you’ll be unable to make an upcoming mortgage payment, the first thing to do it to reach out to your lender before you miss the payment. They’ll discuss your options and come up with a plan that works for your financial situation. Remember that every contact centre in the world is currently swamped, so please be patient.

CMHC Projections

On May 19, President of the Canada Mortgage and Housing Corporation, Evan Siddall made a speech outlining its projections for the mortgage and housing market. Significant concerns were raised, including the prospect of up to 20% of Canadian mortgage falling into arrears. CMHC estimates indicate the ratio of household debt to GDP could reach as much as 130% later in 2020, well over the critical 80% threshold (Canada was already at 99% before the pandemic). It was suggested that the CMHC could increase the minimum down payment on new homes to 10% (it’s currently 5%) in order to curb the growth of debt.

Siddall also said there was a chance that home prices across Canada could fall by 9% – 18% over the next 12 months. It’s important to keep in mind that these are only projections, and even the best projections are rarely exact.

What does this mean for homebuyers and homeowners? It depends, both on your current financial position, as well as how accurate these projects end up being. The best thing you can do is understand the current market conditions and the risks that this pandemic introduces, and make the best decision for you and your finances.

What else can you do?

If you’re worried about being able to make your next mortgage payment because of COVID-19, there may be some features of your mortgage that can help. Here are some of the options that may be available to you:

1. Take advantage of built-in mortgage features

Many mortgage lenders offer a feature that allows you to skip (or, more accurately, defer) a payment when you have short-term financial difficulty. The terms vary from bank to bank, but the general provision is that as long as you have a good history of making your payments on time and don’t use this feature more than once a year, you may be approved to skip payments for up to one month.

There are a few downsides to this option, most notably that your mortgage will continue to accrue interest and you’ll end up making the original payment, plus extra interest, over the remainder of your mortgage. For example, if you have a mortgage rate of 2.80% and 20 years remaining, a skipped payment of $2,000 will cost you an extra $1,403 over the long-term.

If you choose to defer a mortgage payment, you will also continue to be responsible for your property tax obligations and other requirements mandated by your lender, like maintaining adequate home insurance and keeping the property in good repair.

All of the Big Five Banks have mortgage products that allow you to skip a payment, as do some monoline lenders like MCAP. Not all their products allow you to defer a payment, however. Check in with your mortgage broker or call your lender for complete information on your payment deferral options.

2. Access funds with your home equity line of credit (HELOC)

A HELOC is a line of credit that allows you to take out money secured by your home with favourable interest and repayment terms.

The best HELOC rates in Canada are currently Prime minus 0.50%. As the Bank of Canada (BoC) has recently dropped interest rates by a total of one percent, the Prime Rate is at its lowest point since rates started rising in 2017. HELOCs also have flexible repayment terms and typically only require you to pay the interest you accrue each month.

If you already have a HELOC set up, you can withdraw money to help make your mortgage payments while your income is disrupted. It may be borrowing from Peter to pay Paul, but as long as you make your minimum payments, and have the ability to repay your HELOC down the road, it’s a viable short-term option to keep everything looking good on paper.

If you don’t have a HELOC set up already, this may not be the best option in an emergency. Applying for a HELOC takes time and a detailed application, just like a mortgage. It also requires you to use a real estate lawyer, which can cost upwards of $1,000. In all, it can take six weeks or more to complete the process and get access to your money.

3. Negotiate a solution in partnership with your lender

Mortgage lenders are reasonable people who would prefer to help you keep your home and avoid default if at all possible. If you’re having financial difficulty, especially because of COVID-19, call your mortgage broker or lender and ask what options are available to you.

Creative solutions you may be able to work out include:

  • Deferring payments: Especially if you’ve made prepayments in the past, you may be allowed to defer payments for a longer period of time. CMHC-insured mortgages may be eligible for deferral for up to six months for people affected COVID-19. Non-CMHC-insured mortgages may be eligible for longer-term deferral at the lender’s discretion.
  • Extending amortization: By increasing the length of time over which the remainder of your mortgage is paid off, you can reduce your monthly payments. This option may be especially effective if your mortgage is mostly paid off and you only have a few years remaining.
  • Adding missed payments to your balance: If you’ve already missed a payment or two, and you can show that you’re able to start paying on time again, your lender may allow you to bring your mortgage current by making small payments over an extended period of time.
  • Other special arrangements: Your lender may agree to another creative solution if you can show that it will help you get your mortgage back on track.

Every financial situation is different, and all of these options depend on you being able to bring the mortgage current at some point. You’re more likely to work out a deal if you have good credit and haven’t had trouble making mortgage payments in the past. Being proactive and contacting your mortgage broker or lender before you miss a payment may also help you get the accommodation you need.

Remember to be patient when you contact your lender. Their phones will be ringing off the hook at the moment, so don’t stress about long hold times.

4. Make the best of a bad situation

If you’ve exhausted all these options and you’re still unable to make your mortgage payments, you still have alternatives to defaulting. They may not be easy, and may leave your ego bruised, but these may be the best options you have left.

  • Know your rights with your employer. Many provinces and territories have already introduced legislation to prevent employers from dismissing workers over COVID-19 responses. If you’ve had to go into self-isolation or leave work to care for children or ill family members, your right to return to work may be protected by law.
  • Sell your home. Nobody wants to give up their home. But if you have some equity built up, selling your home could free up enough cash to pay off your mortgage and get your finances back on track. This option also allows you to keep your credit intact.
  • File a consumer proposal. A licensed insolvency trustee can help you negotiate a fair deal with your creditors that may free up cash flow while allowing you to keep your home, car and retirement assets.
  • Contact a real estate lawyer. Your lender has rights under the law, as do you. A lawyer may be able to help you understand your options, negotiate with the lender on your behalf, and ensure you are treated justly as you navigate the situation.
  • Look for new options from the Government of Canada. The government has already made a significant effort to aid Canadians who are affected by COVID-19, but new programs may have been announced since this article was published. The latest updates from the Canada Mortgage and Housing Corporation (CMHC) can be found on their website.

If it comes down to it and you fall too far behind on your mortgage payments, your lender can exercise their right of foreclosure or power of sale. If this happens, the mortgage lender can apply to have you evicted from the home and sell it to recoup their costs. This is the last resort for both sides because it’s an expensive, painful, drawn-out process.

Even still, losing your home due to a mortgage default isn’t the end of the world. If there’s money left over after your debts are paid, it may come to you. And you may be able to apply for a mortgage and buy a new home in as little as two years’ time.

The bottom line

The threat of losing your home is almost as scary as the threat of a new virus that’s sweeping the globe. But you have time and options to get through the coming weeks and months without defaulting on your mortgage or ruining your credit – even if it looks bleak today.

By using your mortgage’s skip-a-payment option, borrowing money from a HELOC, or negotiating with your lender directly, you may be able to keep your mortgage up-to-date even if your income is interrupted. If you can’t work out a deal with your lender, you still have options to take control of your debts and avoid losing your home.

The coming months will be trying, but we’re all in it together. All of us – even the banks – are figuring it out as we go. There will be problems and failures along the way. But whatever sets you back, you’re not alone, and you have lots of options to ensure you will continue to have a home in which to self-isolate through this outbreak and beyond.

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