News that Canadian financial institutions were offering some mortgage deferrals sent investors running to the banks in early April, asking for a stay on their payments as personal incomes and investment portfolios were being wiped out by the coronavirus pandemic. Those deferrals seem like a lifeline for investors facing a liquidity crisis, but one leading mortgage broker thinks the impacts of a deferral need to be considered closely.<\/p>\n
Dalia Barsoum, president and principal broker at Streetwise Mortgages, says that investors should consider alternatives to mortgage deferrals. She explained that these deferrals aren\u2019t gifts or grants, as they come with a cost, a likely increase to future payments, an impact on future financing availability and a wider implication for an investor\u2019s credit. Barsoum says despite the pain investors are feeling, they shouldn\u2019t just take mortgage deferment as their first line of support.<\/p>\n
\u201cWe look at mortgage deferrals as a last resort tool for investors to utilize to help ease financial destress,\u201d Barsoum says.<\/p>\n
Barsoum outlined what some of those sources of financial distress are. The primary pressure on real estate investors stems from unemployment, both the loss of their own job or, if they own a rental property, the loss of a tenant\u2019s income. The temporary collapse of Airbnb, too, has resulted in an increase to rental stock in some Canadian markets, putting downward pressure on rents. Further, softening property valuations in some markets, have made it more challenging to extract equity when it is needed most. Even committed deals, not yet closed, might be torpedoed by a borrower\u2019s inability to get a mortgage. The financial pressures on a real estate investor are widespread, perhaps enough to make mortgage deferral seem like the right option. Barsoum says investors need to look at the long-term implications of that short-term fix.<\/p>\n
Her first concern is cost, explaining that interest will accrue on the deferred amount for the duration of the period. Each lender, too, applies its only methodology of repayment for the accrued amount after the deferral period. Investors need to know what that post-deferral arrangement will look like before they sign off on anything.<\/p>\n
That methodology could also result in an increase to future monthly payments. That increase will vary based on the mortgage size, interest, and duration of the deferral. An increase in the debt load will, as well, likely impact an investor\u2019s ability to qualify for future financing, especially if their new\u00a0 payments are higher across several properties within the portfolio.<\/p>\n
Though a deferral is different from a default, and should not have any negative impact on credit, that requires an adjustment to lenders\u2019 systems allowing them to report deferrals in the right way. Barsoum thinks that the sheer volume of deferral requests has increased the risk of reporting errors.<\/p>\n
\u201cIf you are considering a deferral and can wait on it another month, then please do so to allow time for the first round of deferrals to go through the systems and see how that turns out,\u201d Barsoum says. \u201cFurther, if you have chosen to defer by now, then please monitor your credit report for the next 3 months.\u201d<\/p>\n
Current financing arrangements, too, could prove challenging to obtain for investors with an active deferred payment. The logic, as Barsoum sees it, is that in taking a deferment an investor has told the lender whether they \u201ccan or can\u2019t\u201d afford the payment. In such a binary situation, taking the deferment puts you in the \u201ccan\u2019t pay\u201d camp, which carried long-term implications.<\/p>\n
\u201cMy suggestion is to first examine your finances, challenges and plans with your current mortgage advisor,\u201d Barsoum says. \u201cCome up with an action plan before jumping on mortgage deferrals as the first line of support because of panic, fear of the unknown, or fear of missing out on this support tool.\u201d<\/p>\n