How might a mortgage deferral affect my renewal?
By 11 May 2020 4 min read
Because of the widespread financial implications brought on by the COVID-19 pandemic, some homeowners chose to defer their mortgage payments. This allowed homeowners to suspend their mortgage payments, including both principal and interest, for a defined period of time. However, if you have life and/or disability insurance on your ATB mortgage, those premiums will continue to be debited from your account to maintain your coverage.
The interest on the mortgage will still accumulate at the applicable interest rate as set out in your Mortgage Loan Agreement, on the outstanding principal balance, which is one of several things homeowners should consider when deciding whether to defer their mortgage payments. You can learn more about the details of mortgage deferrals in our article, 'Should I defer my mortgage payments?'
Another important thing to consider is how a mortgage deferral can impact your mortgage and payments come renewal time. For the purpose of this article, we’ll assume that the mortgage rate at renewal stays the same as your current mortgage rate. In reality, your mortgage rate will likely change and could go up or down, depending on what market rates are at that point in time.
How can a mortgage deferral impact my mortgage renewal?
Deferring your mortgage payments can have an impact on your mortgage renewal. Your mortgage payment is determined based on the amount you owe, your interest rate and the amortization period (the number of years it takes to pay off your entire mortgage loan). Typically, when a mortgage is up for renewal you would owe less on the outstanding principal and your mortgage payments will go down (assuming mortgage rates at renewal are the same or lower).
If you have deferred your mortgage payment, the amount you’ll owe for your mortgage term (the length of time you’ve committed to your mortgage conditions, such as your interest rate and payment amount, for example 3 or 5 year mortgage terms) will be higher than what was agreed upon when you started the term. Therefore, if you deferred your mortgage payments with ATB, the payments will go up at renewal to make up for the difference and ensure that you’ve paid off the entire mortgage loan by the end of the amortization period (you cannot extend your amortization period).
While we encourage homeowners to explore their mortgage options at renewal, keep in mind that you may have to re-qualify and pass the mortgage stress test if you choose to switch from your current mortgage lender. This could cause complications if you’ve been financially impacted by COVID-19 and need to renew soon.
How much will my mortgage payments increase at renewal?
Unfortunately, we can’t predict precisely what your exact payment will look like at renewal. Your payment post-renewal will depend on the interest rate you get, your mortgage deferral terms and any lump sum payments or increased regular payments made after the deferral period has ended (prior to renewal).
At renewal, higher interest rates will likely increase your mortgage payment. However, interest rates that are lower than your current rate might not mean a lower mortgage payment if you’ve taken mortgage payment deferrals. Even with a lower interest rate, mortgage payments could still increase to make sure your mortgage is paid off by the end of the amortization period.
There’s no straightforward answer to how mortgage payment deferrals can affect your mortgage payments come renewal. We recommend speaking with your mortgage advisor to go over some potential scenarios.
How can I lessen the impact on my mortgage renewal?
While it’s difficult to predict the exact changes deferring your mortgage will have on your future payments after renewal, there are things you can do to reduce the impact. When you start making mortgage payments again, ATB will apply all of your payments towards paying off the interest that accumulated during the deferral period. Once all the interest accumulated, as a result of the deferral period has been paid, payment will resume being applied in accordance with the mortgage terms.
Paying that accumulated interest off as soon as you can will save you money in interest over the amortization period as the principal can then be paid down faster. If you are in a position to do so, at ATB you can:
- Make a lump-sum mortgage payment without penalty,
- Increase your regular mortgage payment amount following the deferral period, and before you renew your mortgage.
While this is ATB’s approach, repayment and renewal processes may differ between financial institutions. We recommend consulting your mortgage lender for specific repayment terms.
How ATB can help
There are a lot of uncertainties out there as we navigate COVID-19. If you’ve lost your job due to COVID-19 or have seen a significant loss of income, or for any other reason, and need to renew your mortgage, let us know so we can discuss options for your situation.