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What To Do If You Can’t Pay Your Mortgage

What to Do If You Can’t Pay Your Mortgage

Covid-19 has left your finances in shambles and your bank account depleted. And you may wonder what to do if you can’t pay your mortgage. Whether you are furloughed, out of a job or sidelined due to the coronavirus, your mortgage comes due every month. Normally, you count on a regular paycheck and you can cover your bills. But these are not normal times.

Don’t let your mortgage payment fall behind before you take action. The first thing you should do is review your mortgage documentation. Some mortgages already have a provision built in to pause your payment in case of financial hardship. If you have that ability, exercise your right: this will give you a reprieve as you look for a longer-term solution.

If this option is not available to you, and even if it is, you’ll want to investigate the mortgage deferral payment option.

Mortgage Payment Deferral for Those Affected by Covid-19

Fortunately, the government has been working behind the scenes with the Big 6 banks to buy you — and millions of other homeowners — some time. How much time? You could have up to six months with no payments. A mortgage payment deferral lets you skip payments while helping you avoid collection activity and the resulting damage to your credit score. If you are unable to work during the Covid-19 crisis, you may qualify. Although you can apply any time during the pandemic, don’t wait until collectors are calling. If you don’t pay your mortgage for 90 days, you’ll have fewer options.

How Does Mortgage Payment Deferral Work in Canada?

So exactly how does payment deferral work? During the deferral period, you are not paying down the principal. You also are not paying the interest on your loan. After the deferral, your principal will not have decreased. Plus, the interest you didn’t pay during the deferral is added to the outstanding principal. So, when you resume your mortgage payments, the total amount that you owe has increased. You’ll have a slightly larger mortgage, which means that over the remaining term of your loan, you’ll pay more.

Let’s say that you have a typical Canadian mortgage with a five-year term and a 25-year amortization period. You currently have $300,000 remaining in principal due on your mortgage at 4%. If the mortgage is deferred for six months, you’ll still owe $300,000 as well as the interest payments you didn’t make for six months. Your mortgage was $1,583 a month, which is made up of $685 in principal and $898 in interest.

At the end of the deferral period, the lender will add $5,388 on to your loan to make up for the missed principal payments. Now you owe $305,388. Your mortgage payment, which was $1,583 a month, is now $1612 — a difference of $29. This slight increase will continue until you refinance your mortgage.

Remember that your bank may have different policies. This is a typical example. In other cases, your amortization schedule, meaning the amount of time you have to repay your mortgage, could be extended. So if you took a six-month deferral, your loan would be extended six additional months.

Is Mortgage Payment Deferral Right for Me?

Mortgage payment deferral is a viable option if it means that you can free up enough capital to help you through these tough financial times. Keep in mind that property taxes and insurance are still due. It’s important that you check with your bank to make sure you understand the specific terms.

As mentioned, payment deferrals are offered by the Big 6 banks, which include:

  • Bank of Montreal
  • CIBC
  • National Bank of Canada
  • RBC Royal Bank
  • Scotiabank
  • TD Bank

Don’t see your lender on the list? If your bank is not included, it might still have a mortgage deferral program. Many do. Call them and ask.

Refinance Your Existing Loan

What if you are still able to make your mortgage payment, but anticipate that you may have trouble in the future? In that case, you may not qualify for a mortgage payment deferral. However, if you are currently employed, you may want to refinance your loan before the situation changes and while the rates are low. In the above example, an interest rate reduction from 4% to 2.7% would save you over $200 a month.

Combined with other cost-cutting measures, you may be able to stay on top of your mortgage until your situation stabilizes. However, although saving a few dollars here and there is great, you may need to make some bolder moves.

Get Help with Your Other BIlls

During this time of crisis, focus on the larger expenditures. This includes your credit cards, car payments and student loans. Call each of your creditors and explain your situation. Many banks, utilities and financial services companies have relief programs in place, particularly during the Covid-19 pandemic.

If you have always paid on time, you may be permitted to skip your payments for a month or perhaps two. But even if your payment history is spotty, there’s a solid chance they will work with you to find a solution. Of course, the skipped payments don’t go away. They will have to be repaid over time or at the end of your loan term.

Also, your utility company may have an emergency assistance program. Or you may be able to pay your current energy bill and make an arrangement to pay the arrears over time.

Follow Your Plan

When you are worried about money, above all, resist the urge to panic. Follow the plan outlined above. Be patient and persistent until you get the help you need. Remember to:

  • Be open and forthright with your lender. They will be in the best position to help you if you provide the information they need.
  • Document everything and keep meticulous records of names, dates and key points.
  • Finish each conversation by confirming what you have written in your notes.
  • Ask questions if you don’t understand. Don’t hesitate to request more information.
  • Be cooperative and reasonable. The bank wants you to keep your house and will work diligently on your behalf.
  • Follow through on any commitments you make.
  • Accept only the amount of help you need to bring your finances under control.

Ask for Additional Help

If you aren’t sure what to do if you can’t pay your mortgage and can’t find an answer, you don’t have to go it alone. There is a solution. Call a Licensed Insolvency Trustee at Adamson & Associates Inc. today. Bankruptcy is not the only answer. We have options. We can help you reclaim your life and keep the things that matter most. Set up your free, no-obligation consultation right now… and breathe a little easier. Call 519-310-JOHN (5646)

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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