Deferrals, credit scores and interest rates: Q and A on mortgages during COVID19

Mortgage payments

Canada’s big banks are now offering payment deferrals on mortgages, which could still have large consequences for homeowners.

For some questions, we asked expert Ron Alphonso, principal broker at Mortgage Broker Store about how deferral options may help in the short-term, but affect you in the long term.



Q: What happens to a mortgage of $100,000 with a $1,000 monthly pay if it’s deferred for six months?

A: That means your principal will be $106,000 in six months. The banks will be charging interest on $106,000, so in fact your overall payments are going up.



Q: What could happen to the default rate?

A: The present rate is 0.09 per cent, which is historically one of the lowest we’ve ever had in Canada...We can expect the trend to go back to the normal or the average of 0.3 to 0.5.



Q: How will this affect credit scores?

A: I don’t think the credit scoring companies can actually put a lot of validity in the next six months to a year, they’re going to have to make some adjustments to the numbers and banks will have to accept a lower credit score. That’s the only reasonable way to handle this since everyone is going to have a problem.



Q: Could the Bank of Canada do more?

A: Yes. If the Bank of Canada lowered (overnight lending rate) that rate to zero, the banks can lower their interest rate to everyone, not just homeowners, but to businesses and so on…It doesn’t cost the federal government anything to do this.



Q: What are your big recommendations?

A: The more you owe, the more you should try and keep those payments going. If you can pay, please do, it just makes your life easier over the long run. If you can’t, talk to your bank or talk to your lender. Ask them what their deferral terms are, ask them if they’re going to charge interest on the deferral. Ask them also if there is a possibility for them to totally eliminate the interest on the deferral.