Deferring Your Mortgage Could Cost You More Down the Road

Young couple sorting through documents and bills looking worried

Well over 700,000 Canadian homeowners have now taken advantage of various mortgage payment deferral programs offered by most mortgage lenders.

It’s no wonder there’s been so much demand, considering more than three million jobs have been lost across the country since the start of March when the COVID-19 lockdowns started to come into effect.

This translated to an unemployment rate of 13% in April, and the employment rate reaching a record low of 52.1%.

Realizing that thousands of newly unemployed Canadians were at risk of defaulting on their mortgages, dozens of lenders, led by the Big Six banks, agreed to allow applicable homeowners the option to defer their mortgage payments. To be eligible, applicants simply had to show that they lost their income as a direct result of the COVID-19 crisis.

The cost of deferring your mortgage

According to the Canadian Bankers Association (CBA), as of mid-May, well over 700,000 Canadians had taken advantage of the mortgage deferral scheme. For these homeowners, the ability to postpone their mortgage payments for up to six months was surely a welcome relief, even though that relief comes at a cost.

While mortgage lenders are allowing many of their customers to delay payment until later in the year when they are hopefully on a stronger financial footing, banks are not delaying interest charges, and the accumulated interest is being applied directly to the outstanding principal.

Not only will this increase the balance of your mortgage, but because the amortization period does not change, you will also have a shorter time period to repay this balance once you resume making payments. As a result, this could lead to an increase in your monthly payments.

This extra cost will depend on how much you still owe on your mortgage, the amortization length and the interest rate, but deferring your mortgage for the maximum of six months could end up costing as much as $2,400 in additional interest charges, according to calculations by mortgage broker David Larock published recently in the Globe and Mail.

In addition, deferring your mortgage does not mean you can delay other homeownership expenses. For instance, costs such as property taxes and insurance payments must still be paid during the deferral period.

Impact on the housing market

The COVID-19 pandemic is also costing homeowners in other ways. Data released by the Canadian Real Estate Association (CREA) indicates that home sales in Canada dropped a record 56.8% in April compared to the previous month and 57.6% versus April 2019. This was the lowest level of sales activity for the month of April since 1984.

Real estate transactions were down across the country, but urban centres, including the Greater Toronto Area (GTA) and Montreal, led the way. In April, home sales declined by more than 65% in the GTA, followed closely by Montreal where activity fell by almost 58% compared to March.

As noted by Bank of Montreal economist Robert Kovac, the Canadian housing market has “effectively shut down and closed for business.”

The one ray of light is that while activity in the real estate market has ground to a halt, prices—for now, at least—have not declined as sharply. CREA’s Home Price Index (HPI)  tracks home prices across the country, and for April, the index declined by only 0.6%.

It’s important to note, however, that this is the first decline in the HPI in over a year, and with May’s HPI calculation almost certain to be another decline, there is growing concern that this could be the start of further losses. While some would-be sellers may hope to ride this out until real estate recovers, not everyone has that luxury.

The longer unemployment levels remain elevated, the higher the likelihood that more current homeowners will be forced to sell. This could tilt the market conditions towards a “buyer’s market,” and while this may be good news for those waiting to get into the housing market, a sharp decline in prices could result in some current homeowners being “underwater.”

This is when a home’s price falls to less than the current market value. This situation presents a serious concern for those who’ve just purchased with a minimum 5% down payment in markets such as Toronto, which has experienced rapid price appreciation in recent years.

For those planning to sell in the near term to downsize their home and bank the difference as tax-free savings, a significant loss in property values could have a material impact on retirement planning.

Related Topics

Mortgages / Personal Finance

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