With everything going on in the world today, it would be nice to believe that the banks and governments would allow Canadians to take a break from paying bills, however, this is simply not true. The government of Canada, in the midst of this Covid-19 outbreak, has made recommendations to Banks and Financial institutions. Part of these recommendations is to allow customers to have up to six months of deferred mortgage payments.
Isabelle Forand, a TD Branch Manager, confirmed this yesterday during The Real Estate Show that customers were able to defer payments up to 6 months. Many banks have jumped on the bandwagon and have agreed to accommodate this request from the government, however, they are not obligated to follow these guidelines. (If you did not catch the segment you can watch it again here.)
Before we get a little deeper into the subject, let’s analyze what it means to take a payment holiday. In most cases, the holiday just means that you are deferring that payment to a later date and it needs to be made up. As well, in many cases, it is only the capital portion of the payment that is to be deferred and not the interest portion. This means that although your mortgage payment will be reduced it will not be eliminated. It is ONLY recommended to take a holiday from a mortgage payment if you have a serious financial need to do so. Otherwise, you can find yourself having to deal with much higher payments in the future that would be making up for what you missed.
What does North East recommend?
If you feel like you have been struggling with debts and payments, it is advisable to consider revisiting the mortgage and debts that you have and attempt to consolidate them into one smaller more manageable payment. In this way, you can free up your cash flow for this time of need.
Here is an example of a recent case we had that translated to over $1,500 of savings for the customer monthly
The client came in with a mortgage balance of approximately $220,000. His monthly payments on the mortgage were $1249. He had accumulated over $50,000 of toxic debt that was used to do household renovations and the payments on his debts were in excess of $1500 per month.
After analyzing the situation we were able to refinance the client at a much lower rate then what he had with his existing mortgage. His rate dropped by .65%. which translated to a new mortgage in the amount of $280,000 and his new monthly payment dropped down to $1,124.71 per month. His savings monthly were $1,715.09
The savings per month are being used now by the customer to rebuild cash reserves and grow his RRSPs.
What if I can not refinance my mortgage?
If you feel that you can benefit from a payment holiday on your mortgage, we would recommend that you reach out to us or your financial institution directly to see if they can put one in place for you. Please remember, in this time of craziness, the banks and brokerages are operating on skeleton crews and such wait times can be longer than normal. Be patient and you will be served by them. If you happened to fall on a representative that tells you that you can not get a holiday, ask to speak with his supervisor or manager. Many times, some representatives are mistaken and it can be a frustrating time for them.
Another option that you can do is if you are currently paying your mortgage bi-weekly or semi-monthly you might find it easier to move to monthly payments, which can help you reduce the load a bit.
I heard that banks are being forced to give a holiday by the government?
In this time of global connectivity, sometimes information from other countries is accepted as local information. This is again not true. In Europe, governments have imposed rules that the banks must follow, including forcing them to give 3 to 6 month holidays on all mortgage payments. The Canadian government has not done this as of yet. In North America, mortgages are structured very differently than how they are set up in Europe. Making a move like this would require massive bailouts from the government. Mortgages in Canada and the US rely on a complex system of Mortgage-Backed Securities (MBS). An MBS is a fixed-rate investment that gives the investor an interest in a pool of many mortgages. As well, usually, an MBS is CMHC backed and as such, the money is typically protected and is fully guaranteed. If customers were to not pay mortgages, this would lead to the underperformance of the MBS. This would almost guarantee the collapse of the MBS. We have seen something like this occur in the recent past when we saw the US suffer massive issues when people could not make mortgage payments. They called the vehicle a Collateralized Debt Obligation (CDO) and although it is a little different, it is fundamentally the same thing.
Should I ask for a holiday or not?
For those of you who know me, I am the eternal optimist. I truly believe that all of this will blow over in a few weeks and we will start to see a semblance of normality in a short while. However, no one knows what tomorrow holds for any of us. The system that we are in right now is very fragile and many self-centered individuals will try and take advantage of it including asking for Employment Insurance and payment holidays from the banks even if they have not been affected by the crisis financially as of yet. As a member of the human race, I ask you to use the resources that you need and not to try and take advantage of a fragile system. If you do, we might all end up in a world of hurt from this crisis and it can turn into something worse than what it could have been.
As always please feel free to reach out to us if you require anything at all. Our number at the office is 514-680-4674 and our email is email@example.com
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