Kamran Malik and his wife Nasira and daughter Rida photographed outside their condo in Scarborough, Ontario, April 1, 2020. Mr. Malik closed his restaurant in Whitby, Ont., early in March to help prevent the spread of the COVID-19 outbreak.Melissa Tait/The Globe and Mail
After Kamran Malik’s online application for a mortgage deferral was denied, he called his local branch in Toronto’s east end.
The bank representative told him that online and phone applications are sent to an underwriter to decide. "They suggested that I go into the branch to speak with my adviser who could forward the application with her remarks,” he said.
Mr. Malik closed his restaurant in Whitby, Ont., early in March to help prevent the spread of the COVID-19 outbreak. He has an immunocompromised wife and daughter at home and was concerned about exposing himself to other people at the TD Canada Trust branch. But he also didn’t want to risk being denied a second time.
Since the big banks announced mortgage deferrals that allow home owners facing financial pressure as a result of the pandemic to skip payments for up to six months, hundreds of thousands of Canadians have scrambled to apply for the program. But confusion and lack of clarity around who qualifies, how the deferrals are structured and whether a skipped payment could hurt credit scores have left people uncertain about how to proceed with housing costs in the midst of a devastated economy.
For Mr. Malik, visiting the branch helped his case. With social distancing in place, the adviser reviewed his banking profile but did not ask him any additional questions, he said. The application was submitted on his behalf and a few hours later, Mr. Malik received a phone call that he had been approved for a two-month deferral on interest and principal.
But the terms on TD’s website state that interest will be capitalized, meaning that it will be added to the outstanding balance and that the client will need to pay interest on interest, increasing the total cost of borrowing – a cost that Mr. Malik was not aware of.
“I consider myself to be well versed in finances, and yet here I am wondering whether my deferral is capitalized or not,” Mr. Malik said. “Otherwise, I would have opted to defer only my principal.”
Incurring the additional cost is worthwhile if the only other alternative is to default, says Rona Birenbaum, certified financial planner and founder of Toronto-based financial-planning firm Caring for Clients. And since banks pay interest on deposits, bonds and other financial products that finance loans and mortgages, customers should not expect a cost-free payment holiday, she said.
“In the grand scheme of things, it may add cost to the mortgage, but if it’s only a six-month deferral, then it’s not going to change the trajectory of someone’s personal finances,” Ms. Birenbaum said. “It has more benefit than cost if it means that someone can keep their home.”
This applies to people who have lost their jobs and do not have savings they can tap to pay their mortgage, she said. People considering deferrals should exhaust all emergency funds and government programs such as employment insurance, the Canada child benefit and the new Canada Emergency Response Benefit (CERB) before choosing this path. The CERB will pay $2,000 a month for four months to individuals who have lost income because of the novel coronavirus.
Canada’s largest banks announced the mortgage deferral program under a tight timeline and requests have by all accounts surged as unemployment numbers skyrocketed. The lenders launched automated online applications and added staff to call centres, but response times that range from one to two weeks are causing banks to prioritize varying customer needs and leaving some applicants waiting.
“Part of the problem right now is that you can’t even get through to your bank, and one of those reasons is because there are a lot of people calling for this deferral who really aren’t even eligible at this point," Ms. Birenbaum said.
Christopher Mills, a Whitby resident who was recently laid off from his job as a pilot at Porter Airlines Inc., requested a deferral from the Bank of Nova Scotia on March 17 – the same day the program was announced. With only a mortgage and auto loan at Scotiabank, the representative asked him to provide the total amount of savings he had at other institutions and informed him that his application would take up to five days to process. Two weeks later, the application for a mortgage deferral was still pending.
When he followed up on his car loan deferral request earlier this week, he said that Scotiabank told him that he was denied, citing the savings he had at a different financial institution. But Mr. Mills said that, even with employment insurance, he will only have enough money to pay his bills until the end of May.
“I might have to put my mortgage on my line of credit just so it doesn’t bounce and reflect on my credit score.”
While many of the banks have said that skipping a payment will not harm a home owner’s credit score, Calum Ross, principal broker with the Mortgage Management Group, encourages customers to confirm the terms with the banking representative, keep detailed records of all information provided, and only defer as a last resort.
Home owners at the beginning of a 25-year amortization period often overlook that their monthly payments are largely made up of interest, Mr. Ross said. Since that deferred interest will be tacked onto the principal, it will inflate their monthly payments and they may need to consider extending the amortization period of their mortgage when they renew.
“I know a lot of people who have gotten deferrals who don’t need to,” Mr. Ross said. “If you don’t need to defer your mortgage payment or you’re not channelling that extra cash flow to pay down higher interest debt, it’s a bad financial decision.”
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