Consumers could face hit to credit scores, jump in payments from mortgage deferrals
Aaron Saltzman | CBC News | Posted: March 22, 2020 9:02 PM | Last Updated: March 23, 2020
'You're going to get hiccups in this process; it's never happened before,' expert says
Canadians couldn't get answers on mortgage deferrals at Canada's biggest bank because information and eligibility requirements kept changing almost by the hour, a source who works for RBC tells CBC News.
When the first details were eventually given out to frontline employees at RBC's Mississauga call centre, they revealed deferrals would be available to all mortgage holders, but in a way that appears to ensure the bank would not lose money in the short term and may even come out ahead.
"Deferrals actually meant that interest accrued from each deferred payment was being added back into the principal balance of the mortgage," said the source.
"Technically clients would then be [charged] interest on top of interest for those payments [that were] deferred," they said.
In effect, it's as though the bank is loaning you the amount that you would have paid in interest during the deferral period and then charging you interest on that loan as well.
"They're going to make more money because they've just loaned you more," said Peter Gorham, an actuary with JDM Actuarial Expert Services.
"I don't know that I want to say it's profiting. I would say it's not costing them a penny." he said.
"I don't know that I want to say it's profiting. I would say it's not costing them a penny." he said.
"People are increasing their debt load. If you are not desperate for the financial relief, don't take it," Gorham said, adding RBC and other banks are taking on increased risk from deferrals, a risk that could grow significantly if the COVID-19 crisis runs from months into years.
When it comes to repaying the increased debt load from a deferral, there may be other complications for mortgage holders.
"This also means an increase in clients' payments at their next renewal period due to the increase in mortgage balance," the source at RBC said.
If the client doesn't want a bigger payment, they can extend the amortization period, the source added. But that typically requires a full credit application which may affect their credit score.
The other option is making extra payments after the deferral period ends to bring the mortgage back down as quickly as possible to its original amount.
Two other big banks have mortgage deferral polices similar to RBC's.
In an updated set of deferral FAQs posted on its website, Scotiabank too says interest will continue to accrue.
"You will pay more interest over the life of your mortgage, but a deferral will also help you with your short-term cash flow," the banks states on its website. Scotiabank is also offering deferrals on personal and auto loans, lines of credit, and credit cards.
On its website, BMO also states interest will continue to accrue on mortgages.
The Canadian Bankers Association issued a statement late Sunday night saying, "Customers should understand that [a deferral] is not mortgage forgiveness. Mortgage deferral means that payments are skipped for a defined period of time, during which interest which would otherwise be part of the deferred payments is added to the outstanding balance of the mortgage."
Credit card deferrals
RBC is also offering six-month deferrals on credit card payments, according to an email obtained by CBC News. But once that period ends the minimum payment would include all accrued interest from the deferred payments. Meaning the minimum payment could jump significantly.
Most minimum payments on credit cards are interest plus $10. But Quebec passed a law in 2017 changing minimum payment requirements in an effort to counter rising household debt by making people pay off more than just accumulated interest.
Minimum payment on credit cards in Quebec is 2.5 per cent of the balance owing and will eventually rise to five per cent.
Confusion
Last week, all of Canada's big banks agreed to a request from Federal Finance Minister Bill Morneau to defer mortgage payments for up to six months for people suffering financially due to COVID-19.
The banks issued a joint statement saying they "have made a commitment to work with personal and small business banking customers on a case-by-case basis to provide flexible solutions to help them manage through challenges such as pay disruption due to COVID-19; child-care disruption due to school closures; or those facing illness from COVID-19."
But initially many Canadians looking for deferrals said, after waiting for hours on hold, they were told they didn't qualify. One BMO customer — who is actually a former BMO branch manager — said he was told he needed a full credit check and credit application and even then the bank would not tell him their criteria for approval.
It turns out the person he spoke with may not have known the criteria themselves at that point.
By midday Wednesday, workers at RBC's Mississauga call centre still hadn't been informed.
WATCH | Consumer frustrated at lack of information about mortgage deferrals
"Anyone calling in to RBC between 8 a.m. and noon was directed to call back 'later' as we had been given no direction or timeframe as to when relief procedures would be implemented, other than 'soon,'" a source told CBC News.
On March 13, the finance minister said that he had already spoken with the CEOs of the big banks. The banks issued their statement promising to work with Canadians on a case by case basis on the evening of March 17, around 7 p.m. ET.
Canadians began calling their banks the morning of March 18.
But, as late as March 20, Canadians were still being told no information was available.
"I was on hold for 11 hours [March 19] and then five hours [March 20]," said Lindsay Gillespie, who has a mortgage and a line of credit with FirstLine Mortgages, a division of CIBC.
"I finally got through and was told there's nothing that can be done right now, they don't have anything set up. I was told to call back another time," she said.
Also as late as March 20, some RBC customers were still being told they didn't qualify for a six-month deferral.
"We called RBC and were told that deferrals are being assessed on a case-by-case basis and that our eligibility for a deferral is limited to six weeks," said Jeff Hecker, a principal at a Toronto Marketing research firm.
"No explanation was provided," he said.
In a statement issued Sunday evening, RBC said "the developments around COVID-19 are moving quickly and we understand that clients have questions. Our frontline employees are doing incredible work to respond to clients quickly and effectively, and we are staying close to them to ensure they have the information they need to support clients."
Hiccups
Some in the mortgage industry say the confusion over deferrals is understandable, given the unprecedented and rapidly changing nature of the COVID-19 crisis.
"You're going to get hiccups in this process; it's never happened before," said Robert McLister, mortgage expert and founder of RateSpy.com.
"It's case-by-case, it's completely at the lender's discretion as far as I understand it. Even though the big banks have agreed with the federal government to offer these programs, there's no mandatory federal guidelines that I'm aware of," he said.
McLister says it's possible some people are being declined mortgage deferrals because they can't prove their income has dropped.
"But generally speaking if you are in legitimate need and you're about to default on a mortgage payment the lender is going to work with you," he said.