More and more Canadians are reporting credit card and car loan delinquencies. And it hardly comes as a surprise – credit cards, vehicle loans, and lines of credit are the first to be affected by household debt. In fact, an Equifax Canada report from June highlights that there’s been a 15.7% jump in mortgage holders missing payments on their credit cards from the first quarter of last year.
High interest rates and the cost-of-living has made it difficult for most Canadians to meet their financial commitments, including making their monthly mortgage payments. Two-thirds of mortgage holders are having trouble meeting their financial commitments.
Experts note that one of reason mortgage delinquencies remain low is that defaults take time. And banks have been allowing borrowers to add unpaid interest to a loan’s principal or extending the mortgage payment term.
Read more: Should you extend your amortization period?
While extending the mortgage payment term might provide temporary relief to borrowers, it only prolongs their debt.
A mortgage term is the duration of your mortgage contract.
Saira Hayat Khan, a realtor with RE/MAX Prime Properties explains that a mortgage extension refers to an arrangement between a borrower and a lender to extend the term or duration of a mortgage loan.
“It involves prolonging the repayment period beyond the original agreed-upon term,” she says.
When you defer a mortgage payment, banks will tack on the missed payments to your loan principal. For example, say you have a 25-year amortization and are in the fifth year of your loan term. If you were to defer six months of payments, you’d have to pay off the remaining amount, plus the six months of missed payments and interest in the remaining 20 years.
While this doesn’t necessarily extend the length of your mortgage, the extension is brought back to original amortization at renewal unless you refinance or apply for a re-amortization.
It's also important to note that a payment deferral depends on your circumstance and is offered at the discretion of your lender. Not everyone is eligible for a deferred payment. If you’ve been a customer in good standing, have a high credit score, and no history of missed payments, the bank can potentially offer you the option to defer payments.
Citing that you have too much other debt is not a reason enough for payment deferral.
Along with the criteria mentioned above, there are certain situations in which a borrower can be offered a payment deferral:
Borrowers who are experiencing short-term financial setback due to unforeseen circumstances, such as a job loss, medical emergency, death of a spouse, or other unexpected circumstances may be considered for a mortgage extension to reduce their immediate financial burden while they work to stabilize their situation.
If an adjustable-rate mortgage (ARM) is about to reset to a higher interest rate, a borrower might consider extending the mortgage term to lower their monthly payments until their financial situation improves.
For borrowers facing the risk of foreclosure due to missed payments, a mortgage extension could potentially offer a way to prevent the loss of their home by making the payments more manageable.
While mortgage payment extensions were offered to customers during COVID-19, the Office of the Superintendent of Financial Institutions (OSFI) is now tightening regulations on mortgage extensions and is calling banks to assess the risks involved with amortization period and mortgage extensions.
But both measures create risks down the road and borrowers should carefully consider the long-term financial implications before opting for a mortgage extension. In addition to paying more interest over the term, it will also take you longer to pay off your debt and eventually, take ownership of your home.
Khan states that it’s important to note that a mortgage extension is not a solution for every individual and their financial situation.
“Borrowers should carefully consider their individual circumstances and the potential long-term costs of extending the mortgage,” she says. “And they should explore other options before deciding on a mortgage extension.”
Depending on the borrower’s needs and goods, other alternatives may be loan modification, refinancing, or seeking financial counseling.
“Consulting with a lender or financial advisor can help borrowers make informed decisions about their mortgage and financial situation,” she adds.