Emergencies can and do come up, and for many homeowners, the biggest monthly expense is their mortgage payment. The use of a mortgage deferral can help provide temporary relief during times of economic uncertainty, job loss, or personal hardship. A deferral provides homeowners with temporary breathing room by allowing them to halt or reduce their payments for a predetermined period of time until they are able to catch up financially. Although this can be a valuable tool, it’s important to understand the mechanics of deferrals and what they mean in the context of long-term financial health.
What is mortgage deferral?
A mortgage deferral is not a debt wipe. Rather, it defers payments, at which time those will be added to the loan balance or paid at a future date. The vital point is that the interest usually keeps up stacking amid the deferral period, which consequently means that the aggregate cost of the loan goes up. These terms may be confusing to homeowners, so be sure you understand them before signing a deal with your lender.
Deferrals can sometimes be granted under special circumstances, such as job loss, illness, or economic downturns. For instance, during the COVID-19 pandemic, deferrals were used in many cases because income was affected for many Canadians. While lenders may have some leeway in their decisions, approvals are not guaranteed and homeowners must prove they have a genuine need for their short-term funding.
Impact on long term costs
Although deferrals may offer some relief in the short term, they have long-term consequences. As the interest accrues, the cost of the mortgage goes up. This can increase the time frame for repayment or increase the total amount due over the life of the loan. Homeowners should consider whether the advantages of not paying their mortgage for a short while are more important than the additional cost.
The amount of impact will vary for those with a residential mortgage, depending on the size of the mortgage balance, the interest rate and the length of the deferral. A short deferral can have little impact while a longer deferral can cost thousands of dollars in interest. It is vital that these outcomes are measured in advance so that no unpleasant surprises are experienced afterwards.
Impact on credit and borrowing capacity
A lot of homeowners are concerned about the impact that a deferral may have on their credit record. If the deferral is formally granted by the lender, in most cases it won’t show as a missed payment on a credit report. However, if you stop making payments without authorization, this could lead to negative marks that would reduce your future borrowing power.
While credit scores don’t necessarily get negatively affected, lenders may still consider how a homeowner has used deferrals when it comes to applying for loans in the future. For example, having regular deferrals may be viewed as a sign of financial instability. This makes it important that homeowners are transparent with their lender about communication and document the terms of any deferral agreement.
Options available to homeowners who want to defer
Before asking for a deferral, homeowners should try other options. Refinancing, or extending the amortisation period for the loan, or changing to a lower interest rate can offer relief without skipping payments. A mortgage broker can assist in investigating these alternatives as they have access to a vast network of lenders and can shop around to compare solutions.
For those who do end up getting a deferral, it is all about being prepared. Lenders will frequently demand details on salary, work and monetary conditions to figure out eligibility. Having documentation in place can help expedite the process and increase the chances of approval. It is also advisable to ask probing questions about payback of payments once the period is over.
Making a plan for repayment after deferral
Typically, at the end of a deferral, homeowners will resume payments and pay back the amount they missed. This can mean increased monthly payments or a longer term loan. Lenders may also provide payment plans that will allow them to pay these amounts back over time, but this will depend on the deal.
It is important to plan well for this transition, and budget wisely. Homeowners during the deferral period should assess their financial condition and make changes to get ready to resume making payments. It can help to build up a cushion of savings or cut back on other expenses to help make the adjustment easier to bear and once the regular schedule resumes, it will not be a drain on your finances.
Conclusion
Mortgage deferrals can be a lifesaver for homeowners who are temporarily struggling to make ends meet. They are short-term fixes that come at long-term costs. Learning the terms, understanding the financial implications, and evaluating alternatives are all important steps before making this decision. In the case of a residential mortgage, speaking with your lender or a mortgage broker can help clarify and determine the best course of action. By making informed decisions, homeowners can tackle challenges while safeguarding their long-term financial stability.
