Worried about making your mortgage payments? Here are some things Canadians can try

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Canadian homeowners are worried about their mortgage payments, with the Bank of Canada hiking its interest rate to 5% this week and the cost of living rising nationwide.

Some are cutting expenses to make these payments on time; some are working side gigs to afford high interest, yet others are helpless and on the brink of losing their homes.

The Financial Consumer Agency of Canada (FCAC) has a guide for people paying their mortgage when experiencing financial difficulties, and it offers some beneficial options. Just make sure you know your rights when considering them.

The agency suggests contacting your bank and discussing your circumstances. A mortgage relief measure, or a combination of relief measures appropriate for your situation, may be offered to you.

The FCAC also identifies high household debt, increased cost of living, and rapid increases in interest rates as “exceptional circumstances” that cause financial difficulties.

It says spiking interest rate increases can affect you if your mortgage has a:

fixed rate and is up for renewal and you’re facing much higher payments
variable rate and your payments are much higher
variable rate with fixed payments and you’ve reached, or expect to reach, your trigger rate

“The trigger rate is the interest rate at which your mortgage payment only covers interest costs,” officials explain. “When you reach your trigger rate, none of your payment goes toward paying down the principal. This means that your payment does not cover the full amount of interest for that period.”

When such a situation arises, a bank will usually add the unpaid interest to the balance you owe on your mortgage, bringing your mortgage into negative amortization.

“In cases of negative amortization, unpaid interest builds up, and the total amount you owe will continue to increase,” explains FCAC. It also cautions that if you don’t take action, you’ll end up owing more money than you expected when you agreed to the mortgage.

“You could even owe more money than the value of your home over time,” it warns.

Your bank is expected to assess the specific mortgage relief measures you might want to consider, treat you with care and attention, and be fair and equitable in their dealings with you.

When you’ve chosen a relief measure or a combination of them, it’s the bank’s job to keep you posted on relevant information promptly and clearly. The bank should tell you the following before you officially and expressly consent to the measure:

the outstanding amount you owe on your original mortgage agreement before the mortgage relief measure takes effect
the impact of the mortgage relief measure on the total cost of your mortgage, in dollars
the impact of the mortgage relief measure on your original amortization period
your new payment amount, due date, and frequency
your new interest rate and type. For example, if it’s fixed or variable
the date on which the change will take effect

Once you’ve given the bank your consent, things must go into action as soon as possible.

Deferral

As per FCAC guidelines, You may be eligible for a mortgage deferral if

you’re at risk of not keeping up with your regular payments
you have an insured or uninsured mortgage
your mortgage is in good standing
your home is your principal residence or non-principal residence

Remember that deferring your mortgage can also impact other financial commitments, such as the property tax or insurance costs included in the mortgage payments.

Default solutions

If you’re at risk of mortgage default, FCAC says the bank you’re working with should look into offering you some of the following relief measures.

It’s expected to:

waive prepayment penalties for lump-sum payments when you’re making the payment to avoid negative amortization or when selling your primary residence
waive internal fees or costs for a limited period when the relief measures begin
avoid charging interest on interest, for a limited period, in cases where relief measures result in negative amortization

Depending on your plan, the bank might even allow you to miss some mortgage payments without reporting you to the credit bureau.

Amortization period extension

As a mortgage relief measure, your bank may offer to extend your amortization period. Your amortization is the length of time it takes to pay your mortgage in full. Extending your amortization may add tens of thousands of dollars to the total cost of your mortgage.

When offering an extended amortization period, your bank is expected to develop a plan with you. This plan is for you to restore your amortization to the original period. They’re expected to create this plan within a reasonable timeframe.

In this plan, your bank is expected to:

make sure the total amortization period is reasonable
offer an extension for the shortest period possible
provide you with information about your options to restore the amortization to its original period

Your bank is also expected to assess and communicate the potential long-term negative financial impacts to you.

Other options

If your bank can offer you an extended amortization period on your mortgage payments, it might help relieve some pressures in the short term. But remember that your total costs could jump tremendously by tens of thousands of dollars.

“When offering an extended amortization period, your bank is expected to develop a plan with you,” the FCAC states. “This plan is for you to restore your amortization to the original period. They’re expected to develop this plan within a reasonable timeframe.”

If you choose this route, the bank should make the total amortization period more reasonable and offer an extension for the shortest period possible.

“[Your bank] should also provide you with information about your options to restore the amortization to its original period,” the federal agency’s guide reads.

If you choose to renew your mortgage, the bank is expected to communicate all terms and conditions to you concisely and straightforwardly and give you the best interest rate it can offer.

But if you feel that you need to sell your home to get by, your bank is expected to share everything you need to consider before moving ahead with the step.

Your financial assistant’s feedback should reflect your financial circumstances, needs, and well-being.