When provinces right across the country decided to require that businesses close due to the COVID-19 pandemic, Canadians were sent home to wait out the storm – many without pay. While some have made the transition and are working from home, others are experiencing financial distress and are struggling to pay their mortgages.
In April 2020, there were almost 500,000 requests for mortgage deferrals or to skip a payment just two weeks after Canadian banks announced their mortgage deferral program. It has also been reported that 1.5 million Canadians have moved back in with their immediate families due to the pandemic. Even Airbnb is advocating for federal support to help hosts who are strapped for cash and may not be able to pay their mortgages.
If you’ve found yourself in the unfortunate – and unforeseeable – position where you can’t afford your mortgage, don’t despair. You may be asking, “What are my mortgage options?” Even though adequately preparing for a global pandemic is impossible, there are some practical steps you can take if you’re having problems paying your mortgage. Keep reading to learn more about what to do.
Ask For a Mortgage Deferral
As we mentioned above, there were 500,000 requests for mortgage deferrals in Canada, allowing Canadians to skip a much-needed payment or two while their financial situation remained precarious. If you don’t have a sufficient emergency fund to weather this economic storm, a mortgage deferral is an excellent first line of defence.
Mortgage deferrals are offered by most of the major banks in Canada, and applying for one lets you skip one or multiple mortgage payments. It’s important to note that a mortgage deferral does not erase or eliminate the amount owing on your mortgage. At the end of your deferral, you’ll resume payments. Depending on the lender, missed payments will either be added to the end of your term or due as a lump sum payment. Deferring your mortgage will not affect your credit score.
Refinance Your Mortgage
A mortgage refinance is when you break your current mortgage and start a new one, either with the same lender or a new one. There are plenty of reasons to refinance your mortgage, including to secure a lower interest rate or to access the equity in your home. If you’re having trouble making your monthly mortgage payments, refinancing could lower your monthly payment if you’re able to renew at a lower rate. Fortunately, interest rates are at an all-time low, so the odds are good that you’ll be able to refinance with one of the best mortgage lenders and have lower monthly payments.
That said, if you have multiple years left on your mortgage, you’ll have to pay a prepayment penalty, which compensates your lender for breaking the mortgage term early. Each lender calculates their prepayment penalty differently, so to find out what yours might be, call your lender and ask. You’ll need to weigh the pros of lowering your monthly payment with the cons of the prepayment penalty to determine if this is a wise decision in the long run.
If you’re thinking about refinancing, a good place to start is RateHub.ca — an online portal that allows you to compare financial products oline. With a single search, you can compare mortgage interest rates in real-time, estimate your mortgage penalty charges, and if needed, get advice from a broker on whether refinancing makes financial sense.
Ask For a Blended Mortgage Rate
If the prepayment penalty is too high to consider a straight refinance, you could also consider a blended mortgage rate. It will allow you to avoid a prepayment penalty but still lower your mortgage interest rate and payment. A blended mortgage means combining the mortgage rate from your current mortgage with the mortgage rate from a new mortgage that results in a rate somewhere in between the two. Because you aren’t technically breaking your existing mortgage, you’ll avoid the prepayment penalties associated with a regular refinance, but you should still be able to lower your monthly mortgage payment. That said, it may not be enough to make ends meet, and if you still can’t pay your mortgage, there is one more (extreme) option.
Sell Your Home
If you’ve exhausted your options and you’re still having problems paying your mortgage, it might be time to consider selling your home. We don’t make this recommendation lightly; however, selling your home to be free of the financial burden of a mortgage payment may be your only option. Should you miss too many payments, you may end up in foreclosure — a stressful situation no one wants to go through.
If you’ve thought, “I can’t pay my mortgage – now what?”, the first thing you should do is determine the value of the property. Your home’s potential selling price, combined with your outstanding mortgage balance, will help you determine how much you stand to profit from the sale of your home. One solid place to start is Properly’s ProperPrice Report, which compares your home to recently sold homes in your area and gives you a price estimate – instantly, and completely free.
If you’re serious about selling and perhaps downsizing to a smaller, more manageable home and mortgage, Properly also offers a Buy Before You Sell Service, which allows homeowners to purchase a home before even listing their current home on the market. The Buy Before You Sell Service provides you with a guaranteed offer, which enables you to move on to your next home without worrying about whether or when your current home will sell.
Once you move into your new home, Properly will clean, stage, and show your home, and if it doesn’t sell within 90 days. It will also buy it directly from you at the guaranteed sale price. The cost to use Properly is about the same as a traditional realtor (about 5%), so if you need to move out of your home fast and can’t afford to wait months for it to sell, Properly may be a good option.
Rent Out Your Property
To avoid selling your home, you could consider renting out all or a portion of your property instead. If you have a spare room that could be rented out, that could help bridge the gap and avoid relying on credit or missing mortgage payments. Alternatively, if you have family nearby, it may be possible to rent your entire home to cover your mortgage and move in with relatives. One or both of these options may not work for you, depending on your living situation, but they are worth considering if you cannot cover your mortgage payments with your current income.
Create an Emergency Fund
To ensure you can make ends meet when the unexpected happens, create an emergency fund – a dedicated savings account to draw from when you aren’t earning enough to make ends meet. Most personal finance experts recommend having 3-6 months of fixed expenses saved.
Since you may need easy access to your savings, your best bet is to stash your cash in a low (or no!) fee high-interest savings account, such as the Savings Plus Account offered by EQ Bank. The everyday interest rate is 1.70%* – one of the highest non-promotional rates available in Canada. That way, you will still earn decent interest on your savings but can withdraw the money when you need it.
Get Life Insurance
Life insurance provides financial assistance to your loved ones if you die. You pay monthly premiums on the policy and, if you die during the coverage period, your beneficiaries receive a lump-sum death benefit. If you have a spouse or children who rely on your income, a life insurance policy is vital. It will help pay their expenses and maintain their lifestyle if you die. Without life insurance, your loved ones may need to sell your assets, go into debt, and/or forgo educational opportunities.
To find competitive pricing, we recommend using an online search platform, such as PolicyMe, to compare rates from the top life insurance companies in Canada. PolicyMe’s non-commissioned sales advisors will help assess your coverage needs and submit your application online. Also, no medical exam or doctor’s statement required for certain insurers.
Get Mortgage Insurance
Mortgage insurance covers any outstanding balance on your mortgage should you die before you finish paying it off. If you can’t get coverage for life insurance, mortgage insurance can be a good alternative.
While many mortgage lenders offer policies, the mortgage protection insurance offered by PolicyAdvisor.com is worth considering. It offers a unique hybrid: the policy is essentially a term life insurance policy, but with a term that matches your mortgage amortization period, and coverage equal to the full amount of your mortgage.
Apply for Critical Illness/Disability Insurance
There are two types of insurance that you should consider adding to your coverage. The first is critical illness insurance, which pays a lump-sum benefit if you are living with a serious illness or disease, such as cancer. There’s also disability insurance, which provides coverage against lost income due to an illness or accident. If you can’t work, long-term disability insurance will replace a percentage of your monthly income, up to a cap. Most employers offer some disability coverage, but no critical illness coverage.
For critical illness insurance, Kanetix is a solid resource for comparing coverage with Canada’s best insurers in a single search. With Kanetix, critical illness insurance can be added to your life insurance policy, or you can purchase it as a stand-alone policy. For disability insurance, PolicyAdvisor.com can help you find a disability insurance plan that suits your circumstances. They offer both short-term (6-26 weeks) and long-term policies (2 years, 5 years, or up to age 65).
Make a Will
Everyone needs a legal will, otherwise, you risk the government making decisions about your estate after you die.It’s a legal document that names your beneficiaries and what you want them to have. Making a legal will doesn’t have to be expensive or involve going to a lawyer’s office. If your needs are uncomplicated, create an online will using a service like Willful. Willful is an online legal will creation platform that lets you create a standard legal will at home in 20 minutes for as little as $99.
The Final Word
Making the hard decisions about how to pay for your mortgage is stressful. It might involve selling your home, but remember that this situation is temporary. Every Canadian has been affected by this unfortunate and unexpected situation, but we’ll all recover financially sooner or later. No one has a crystal ball that can predict the future, but at least you can be prepared to handle whatever life throws your way.