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The deferral dilemma: what to do if you (still) can’t afford making mortgage payments
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What are your mortgage payment options when you’re fresh out of options and cash flow?
For 760,000 Canadians financially impacted by COVID-19, deferring their monthly mortgage payment was the only viable option for keeping their household budgets afloat. In many cases, those deferrals also meant the difference between keeping their home and having to sell it.
It’s been almost 6 months since the nationwide mortgage deferral program was rolled out.
As the end of the deferral term limit approaches, many are now faced with the same predicament as they were at the start of the pandemic. Not being able to cover their mortgage payments. According to a recent study from Mortgage Professionals Canada, this is the case for 23% of Canadian homeowners who expect some degree of difficulty making their mortgage payments. While 5% are anticipating a higher degree of difficulty once the deferral period is over.
If you’re facing a similar mortgage payment dilemma, here are 4 possible solutions:
#1: Extend your amortization period.
Your monthly mortgage payment is determined by a combination of your initial down payment, your mortgage term (the length of time you are committed to a particular interest rate/lender), and your amortization period (up to 25 years for CMHC-insured mortgages; up to 30+ years for non-insured mortgages). By extending your amortization period, you’re in effect taking longer to pay down your mortgage—which will decrease your monthly payments.
Keep in mind the ability to stretch your mortgage over a longer time horizon entirely depends on:
- Your lender (although many are making exceptions on a case-by-case basis due to the pandemic)
- How far you are into your amortization period (I.e. if you’re a new mortgage holder, chances are you won’t have the extension room to make this a feasible option)
While this solution won’t lighten your financial burden as much as a deferral, extending your amortization will at least provide a little more breathing room where your budget is concerned. Plus you’ll still be working towards paying down your balance. This is a definite benefit over deferring your mortgage payments altogether (because interest will still accrue, regardless of whether you’re making payments or not).
#2: Consolidate credit cards and loans (using a line of credit) to free up cash flow.
Juggling high-interest debts outside of your mortgage could be another reason your finances are being stretched too thin. If you already have a line of credit in place, consider consolidating those balances to reduce the number of monthly debt/interest payments. This will free up more of your cash flow to cover essential expenses (such as your mortgage) without necessarily having to make more money.
Credit options to avoid at all costs:
- Payday loans (these come with the highest fees and interest rates)
- Cash advances from credit cards (these have a tendency to max out credit limits all-too quickly)
- Advance-fee loan schemes (these have been surfacing online during the pandemic, where people are asked to pay money upfront before receiving any funds—it’s a total scam, don’t do it)
Learn more about our better borrowing options, exclusively for education members.
#3: Consider taking on roommates/tenants.
If you’re hesitant about extending your amortization period or utilizing a line of credit, you may want to look into boosting your monthly cash flow instead. Rental income is one of the easiest ways to do this. Bringing in roommates to fill those unused bedrooms (or tenants, if you have the space for a basement apartment) could provide the extra money you need to cover some or even all of your mortgage payments.
A few rental income tips
- Do your landlord/tenant legislation homework, as municipal bylaws differ with each city/town/region
(check out the Canada Housing and Mortgage Corporation website for more information including updates regarding COVID-19)
- Write up an official lease and have it signed—this will protect both you and the tenant
- Inform your home insurance provider about your rental unit (not telling them could void your policy in the event of a fire or other damage caused by your roommate/tenant)
- Beware of the tax implications, as all rental income must be claimed on your tax return
Looking for other ways to boost your cash flow? Here are 5 tips for saving up to $500 a month.
#4: Rent out your home or sell and downsize.
This can be one of the hardest things to consider. Yet for many people in Canada and around the world, 2020 has been the one of the most challenging years, both financially and personally. So, if the bills are adding up faster than you can pay them off, perhaps it’s time to eliminate your biggest financial obligation (your mortgage)—at least for the time being.
You have two options on this front:
- Rent out your home: With this option, you would move out; then somebody else would move in and pay you rent. You would retain full ownership, which means all costs attributed to the home (I.e. mortgage, property tax, etc.) would still be your responsibility. However, you could set the monthly rent to cover these costs (which would then be paid by your tenants). There are of course added responsibilities to being a landlord, above and beyond being a homeowner (such as having to immediately look after any repairs/issues, as well as tax implications, etc.). You would ultimately have to weighs the pros and cons of going this route and then decide whether it’s your best course of action.
- Sell/downsize: This would most likely be your last resort, yet definitely worth considering. Especially if all other options are off the table. Depending on how much equity you have in your home, selling would afford you the ability to pay off all of your debt and provide you with enough of a financial cushion to regroup. You could even invest a portion of the proceeds (of the sale of your home) into something like a TFSA. This money would then grow over time and be instantly accessible for when you’re in a better position financially to buy your next home. Finally, if you don’t have any other choice but to sell, remind yourself that this is only temporary. Your situation will improve. You will own again.
At the end of the day, we understand that your home is everything to you.
If you’ve been feeling the financial impact as a result of the pandemic, reach out to us. No matter where you are on the pay grid or what your pension income is in retirement, we can help review your financial situation and provide guidance on how to financially navigate through these tough times.
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