Should I defer my mortgage payments amid COVID-19?
By ATB Financial 21 April 2020 8 min read
As the COVID-19 pandemic sweeps through the world, it has caused businesses to slow down, shut-down, and in many cases, lay off their employees. If you’re affected financially by this crisis, the Government of Canada and other organizations have provided benefits and deferral programs that can help you make ends meet.
Along with many financial institutions and banks, ATB Financial is offering mortgage payment deferral to those impacted financially by COVID-19. Understanding exactly how mortgage payment deferral works is important in helping determine if deferring payments is right for your situation.
Below we answer commonly asked questions about mortgage payment deferral, including how to decide if this is the best option for you. While ATB mortgage deferrals are likely similar to other financial institutions offerings, including the Canadian Big 5 banks, you should always discuss your mortgage terms with your mortgage provider.
What is a mortgage loan payment deferral?
Simply put, a deferral on your mortgage means that your payments (both principal and interest) are suspended for a defined period of time.
When you defer your mortgage, interest still accumulates at the applicable interest rate, as set out in your Mortgage Loan Agreement, on the outstanding principal balance (this is the current amount owing on your mortgage outside of interest and other fees). Deferral doesn’t mean you are not responsible for those payments anymore, it just means you are taking a break from them. If you have life and/or disability insurance on your mortgage, your premium payment will continue to be debited from your account during the deferral period to maintain your insurance coverage.
It should be noted that at ATB, the terms ‘skipping a mortgage payment’ and ‘deferring a mortgage payment’ can be used interchangeably because they are generally the same (you are still responsible for the payment). The only difference now is that under ATB’s mortgage deferral program, you can defer up to six months worth of payments.
How does repayment work when the deferral period finishes?
After the mortgage payment deferral period, your mortgage payments will resume. Over the deferral period, you will have accumulated interest on your outstanding balance. At ATB, we will apply your payments first towards all interest accumulated during the deferral period (typically part of your payment goes towards interest and part towards your outstanding principal balance). Interest will also continue to accumulate at your applicable rate on the outstanding principal balance. Once all interest accumulated as the result of the deferral period has been paid, payments will resume being applied in accordance with your mortgage terms and the original payment schedule.
Here’s an example of how it works:
Let’s assume your mortgage payment is $2,000 a month, your interest costs are $500 a month and you choose to defer your mortgage payments for six months.
|April to September||Over the six month deferral period (April to September), you have accumulated $3,000 in interest.|
|October||Your monthly mortgage payment resumes. October’s $2,000 payment is applied towards interest, decreasing the accumulated interest owed from $3,000 to $1,000; $500 in interest accumulates against the outstanding principal balance in October.|
|November||November’s $2,000 payment is applied towards interest. The remaining $1,000 of accumulated interest from the deferral period, plus the additional $500 of interest accumulated in October are now fully repaid. The remaining $500 fully pays the interest for the month of November.|
|December||December’s $2,000 payment is applied in accordance with the mortgage terms.|
This example reflects a hypothetical scenario for illustration purposes only. Please connect with us directly to understand the impact of deferring your mortgage payments.
While this explains ATB’s approach, repayment processes may differ between financial institutions, which is why we recommend consulting your mortgage lender for specific repayment terms.
How can I make up for the deferred payments?
At ATB, to help reduce the impact of increased interest costs, you can repay deferred payment amounts at any time during your mortgage term without penalty. For example, if you have unexpected money come in, you can put a lump sum payment on your mortgage. Another option is to increase your regular payments once your deferral period is over, helping you catch up on missed payments quicker.
Repaying deferrals as soon as possible allows you to get back to paying down your principal. That means less interest paid over the amortization period of your mortgage. The amortization period is the amount of time it takes to pay off your entire mortgage. If your situation changes or you realize that you no longer need to defer your payments, you have the option to end the deferral at any time and resume regular payments.
If you’re looking to make any lump sum payments or increase your regular payment amount, be sure to connect with us directly (do not use online or mobile banking), so we can ensure your repayment terms are applied correctly and that you understand any impact to your future prepayment options.
Will deferring my mortgage impact my credit score?
Deferrals are not reported as missed payments to the credit bureau, so there is no impact to the repayment status of your loan. However, since the outstanding balance of a loan is one of the many elements used by credit bureaus to calculate a credit score, there may be a minor impact to your score if the outstanding balance of your loan increases as a result of making a deferral.
If you are unable to make your payments when they resume your credit score will be impacted, so please connect with us before the end of the deferral period so that we can help you explore more manageable options. The sooner you meet with an advisor, the more options you will have available to you.
How can I determine if mortgage payment deferral is the best option for me?
If you’ve experienced job loss, loss of income, or a significant reduction of income because of COVID-19, mortgage payment deferral is an option available to you. During this difficult time, payment deferral can help you manage your cash flow over the next 1-6 months and give you the time to update your financial plan if your work or financial situation has changed.
Determining whether mortgage payment deferral is right for you can be confusing and stressful. Here are some questions you should ask yourself when deciding:
1. What is my current financial situation?
Before exercising the option to defer payments, we recommend taking the time to evaluate your current financial situation and priorities. Because deferring mortgage payments will increase your interest costs over the life of your mortgage, it’s a good idea to weigh out your budget, review your savings and determine whether you are comfortable with the terms of deferral. If you don’t have a budget in place, our Monthly Budgeting Worksheet is a great resource to get you started.
When evaluating, ask yourself:
- “Has my monthly income changed?" This will clarify whether or not you need to free up cash flow for short-term needs.
- “Do I have savings I could draw from?” An evaluation of your savings may clarify how many payments you should defer, or if you should defer at all. A conversation with an advisor may help you decide whether dipping into your savings is the best option.
- “If I don’t defer, will I default on my mortgage payments?” If this happens, your mortgage account will be flagged as delinquent (not in good standing) which may negatively impact your credit rating.
If you are considering selling your investments to make mortgage payments, we highly recommend consulting your financial advisor about your options before making a decision. A financial advisor can explain the potential impacts of selling investments and how that would affect your long-term financial position.
2. How long do I need to defer for?
Exercising mortgage payment deferral is not ‘all or nothing’. After evaluating your financial situation, you may decide you are more comfortable deferring one or two payments versus six months worth. Remember, you can end your deferral at any time if your situation changes and you are able to resume regular payments again. Resuming regular payments will help you get back to paying down your principal balance faster.
3. How will this impact my finances long-term?
There are two potential scenarios:
- The first is if your amortization period (time it takes to pay off your entire mortgage) is longer than your current mortgage term (the length of time your mortgage details are guaranteed). If this is the case for you, your monthly payment may increase when your mortgage term matures and it’s time to renew. This is so that the amortization period of your mortgage is not increased or lengthened as a result of the deferred payments.
- The second scenario is if you are in the final term of your mortgage (scheduled to pay off your mortgage in full when your mortgage term matures). As a result of the deferred payments you will not have paid all the principal and interest owing by the end of the amortization period of your mortgage. There will be a lump sum due, which you can either make as one lump sum payment on your mortgage maturity date, or increase your monthly payment amount when your deferral period ends.
How do I apply for mortgage payment deferral with ATB?
Eligibility for mortgage payment deferral with ATB is simple. If you have experienced any kind of job loss or interruption as a result of COVID-19 and you’re struggling to make ends meet, you are eligible.
To learn more about our Customer Relief Program, understand the potential impact of deferring your mortgage or to sign up for mortgage payment deferral, contact our Client Care Team. We’re here to help!
For more information and resources to help you through COVID-19, including details on key government relief programs, visit atb.com/together.
ATB is offering deferral options on various other personal and business banking products. Visit atb.com/covid-19/understanding-deferrals for a list of available deferral options and an explanation of how it works when you defer payments for different products.