By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929
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Since the World Health Organization announced that COVID-19 had become a pandemic, there has been gross economic fall out all over the world. In Canada, large and small businesses have temporarily closed, leaving many employees no longer working or drastically reducing their productivity, and many people have been laid off, such as those on a contract or paid by the hour. The unemployment rate, while in this quarantine and self-isolation period, can be compared to that of a great depression since it now easily exceeds 20 percent of the population. According to Canadian Federation of Independent Business, it expects 25% of businesses won't be able to survive a one month closure.
In Canada, it's also not a secret that most people pay a large part of their monthly income towards mortgage debt. Ironically, even before the Coronavirus pandemic, Canadians had a significant problem concerning affordability in cities like Toronto, Greater Toronto Area and Vancouver. Payment shock - where a rise in interest rates causes sudden mortgage default - was a paramount issue addressed continuously by the Government, which led to the stark implementation of the Mortgage Stress Test, foreign investment tax and changes to insurable mortgages, for example. These measures were meant to bring down overheating in the real estate market.
The idea that a better global economy, with the need for rising interest rates, could push borrowers into insolvency never materialized—quite the contrary. Instead, the insolvency and default risk is now from a virus, and it's ravaging the economy at an accelerated and unprecedented speed.
For mortgage borrowers, the fear of default is now front and centre and figuring out what the consequences mean is a top priority for Canadians. In a typical scenario of mortgage default due to economic changes and a rise in interest rates, a lender can enforce remedial measures such as foreclosure or power of sale, which would allow it to take possession of the property and resell it to recover any potential losses.
Fortunately, during this time of uncertainty where default is likely inevitable, banks and other financial institutions like those accessed through the broker channel, are working closely with mortgage borrowers to eliminate any financial risks in the near future. By using a well-known mortgage privilege called "Skip a payment" and "Defer A Payment," borrowers can make comfortable arrangements with their lender to manage the next couple of months.
Explained, deferring or skipping a payment means paying a mortgage later. The mortgage payment does not get waived. Instead, it is delayed and usually added to the end of the mortgage loan. Additionally, interest usually still accumulates from the date of deferral, and so its important borrowers speak to their lender to ensure they understand the total cost involved in deferral.
Concerning the Coronavirus, to be eligible for mortgage deferral, a person must be in quarantine due to possibly having or being diagnosed with Coronavirus or must have been laid off from their employer due to Coronavirus concerns. Keep in mind, each lender has its specific criteria and borrowers should call their respective mortgage lenders to ensure they fit the criteria and to commence or schedule deferring their payments.
Generally speaking, mortgage lenders offer deferral in situations where a person has become unemployed or experience a significant financial setback, so exercising this option because of the Coronavirus is entirely natural. Most lenders always offer the ability to pause a mortgage or take a "payment vacation" for unexpected situations. Exercising these options, if approved by the mortgage lender, will not have a negative impact on a person's credit or the ability to renew or refinance their mortgage.
If you require help navigating this process, please do not hesitate to call or write.
Sarah A. Colucci
Mortgage Agent Lic. M14000929
Mortgage Edge, Broker 10680
Direct: (647) 773-4849