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Defer your mortgage only if absolutely necessary

Area home sales plunged 55 per cent in April compared to the same time last year show the latest figures from the Realtors Association of Edmonton.
Area home sales plunged 55 per cent in April compared to the same time last year show the latest figures from the Realtors Association of Edmonton.

As of April 22, more than 710,000 Canadian mortgage holders have received financial assistance from their lenders, through mortgage deferral plans or skipping a monthly payment.

That represents more than 10 per cent of Canada’s six largest banks’ mortgage portfolios.

“Canada’s banks are standing by Canadians to help our country work through these challenging times,” says Neil Parmenter, president and CEO, Canadian Bankers Association. “COVID-19 is the most urgent challenge our country has faced in recent memory and banks will continue to help those who need their help and support.”

Under a mortgage deferral plan, mortgage holders can defer monthly payments for a period of time, which will be an assist to the economy going forward, says Rob McLister, an editor with rates.ca

“Thank goodness the government negotiated deferrals with the banks,” says McLister. “They had to do something to avoid mass defaults. If you had a scenario like in the United States during the credit crisis, where defaults were exceeding five per cent, that would have a horrendous impact on the economy and it would take you far longer to get out of the hole.”

A deferral is not a free ride, says Mark Herman, a broker with Mortgage Alliance.

“Mortgage holders will end up paying more overall,” says Herman. “The deferred payments are added onto the end of the existing term, not at the end of the entire mortgage.

“Banks will want all of those deferred payments, with the interest on the unpaid interest added on top, to be paid back at or before the end of the existing term. This means paying interest on the interest you deferred. That is going to be a tough nut to swallow for most people but if you have no option, then it is what it is.”

Defer only if absolutely necessary, says Herman.

“It will keep you out of what we are calling the deferral trap, which is when all the payments that were deferred, and the interest not yet paid, needs to be repaid or the lender could renew you at any rate they want, such as posted rates,” he says. “The only way you could change banks and still get a competitive rate would be to catch up all the owed funds. If you had to defer already, where are those funds going to come from?”

Guidelines vary by lender.

“The mortgage insurers are leaving it to the lenders to decide if they will defer payments or not,” says Herman. “So, if they say ‘your mortgage is too new’ or if you have not been laid off, have not tested positive for COVID-19, or your credit is not good enough, or they want to redo the entire mortgage application, then it is their choice on what is needed to allow the deferral. The way around this would be to contact your mortgage insurer directly to see if you can work through them if your bank is not cooperating.”

Herman advises visiting your lender’s website for its deferral plan guidelines.

Copyright Postmedia Network Inc., 2020

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