It's Your Money  

Mortgage 'vacation' ending

The six-month “vacation” that many Canadians took from their mortgage and other debt obligations is coming to an end.

It has been a little over six months since the official declaration of a global pandemic.

By the end of June, 760,000 Canadians had put their mortgages on pause and 2.6 million (or roughly 10% of credit consumers) had put at least one of their debt obligations on an active deferral.

These deferrals were meant to help households stay financially solvent during temporary unemployment with the hope that the labour market would significantly recover by the time the deferrals expired.

To further complicate the problem, the significant government handouts will also be ending around the same time. 

Last week, the latest Canadian household debt ratio numbers came out and they showed a dramatic decline from 175.4% to 158.2%, which sounded quite promising on the surface.

But the true story is that debt loads didn’t shrink at all during the past few months, only that disposable income went up due to the entire stimulus.

What happens if your deferral is about to end, but you can’t afford to resume payments?

Let’s look at two main scenarios and how to respond.

If it looks like you’ll be able to start making the payments again soon, you can consider several options.

A short-term loan or borrowing from a line of credit might be the simplest solution if you have either option available. But if you’re not confident you’ll be able to start paying again soon, this could put you much farther into debt in short order.

You should also consider reaching out to your lender and explaining your situation. If you can prove that you just need a little bit more time, they may be open to extending the deferral a little longer for you.

If you go this route though, be careful to fully understand what other ramifications their extension comes with. 

If it looks like you are nowhere near ready to start making payments again, some additional planning is likely going to be required.

It’s unlikely that a lender will do a significant additional deferral for you, but you should still discuss with them right away. If you wait until after you’ve missed a payment, your options will quickly dwindle.   

For some, a major decision may need to be made including selling your house or filing a consumer proposal.

Selling your home may not sound appealing, but it would be much better for you to be in control of that situation instead of having your bank foreclose and sell it for you.

A consumer proposal could allow you to reduce your non-mortgage debt and stay in your home as long as you can keep making mortgage payments.

What if you chose to take a deferral to build up a emergency cash reserve and can afford to not only start re-paying, but can also put that built up reserve against your outstanding debt?

At this point, the outcome of the pandemic is nowhere near clear and a second shutdown seeming more and more likely.

Even though you’re accruing a little extra interest from the deferral, you might want to consider going back to regular payments only and sitting on that cash reserve a little longer.

Once things fully settle down, you can decide what to do with your emergency fund then.

Regardless of what position you’re in, the worst thing you can do is nothing.

Be proactive in your financial situation, no matter how bleak it may feel and make the best decisions available to you by getting all of the information and the best advice.  


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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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