By Jane Londerville, March 26, 2020
This is an unprecedented time of uncertainty for Canadians. Aside from health concerns, COVID-19 is creating large economic uncertainties for both households and small businesses. The federal government has announced programs to at least partially replace income for those laid off or self-employed. Despite this, many Canadians are still left concerned about covering their expenses during the quarantine, particularly given lack of certainty about how long it will be until regular income restarts. The most significant costs for most households and small businesses is mortgage payments or rent, property taxes, and utilities.
Canada Mortgage and Housing Corporation (CMHC), along with the other mortgage insurers in Canada (Genworth and Canada Guaranty), have announced they will work with the banks to allow borrowers to defer mortgage payments for up to six months. While the announcement discusses the big six banks, a review of websites indicates secondary lenders are also willing to negotiate with borrowers. This has always been a quiet option for borrowers who were temporarily unemployed or had to stay home to care for an ill parent, for example.
This is not cost free to the borrower. Interest will continue to accrue and compound on these missed payments. Suppose a borrower has a $300,000 outstanding balance on their mortgage loan, at a rate of 3 percent. If they stop making their payments for six months, the outstanding balance on the loan will rise to $304,500. They then restart their payments but have an additional $4,500 owing on their loan. Some may be able to increase payments or pay off this extra interest in some other way, however, most people, after missing six payments, would only be able to resume regular monthly payments so the interest would continue to accrue until the end of the term.
This is a sensible option for those who risk losing their house due to lack of income during this time. But borrowers who can maintain their mortgage payments should do so. The announcement of the program has challenged the capacity of the banks to respond to requests for assistance. The Prime Minister has asked borrowers to carefully consider not applying for relief if it is not necessary so that those who require the program to survive financially can access service.
This reduction in the flow of mortgage payments could pose cash flow issues for the banks. To alleviate this, the CMHC has agreed to buy up to $50 billion of insured mortgage loans from lenders. This is a strategy that was used during the global financial crisis to avoid liquidity problems in the financial sector in 2008-2009 and was highly successful in reducing the impact of the crisis on Canada’s economy. Since the CMHC is buying an asset when purchasing the loans, this is not a cost to taxpayers.
Homeowners also face the cost of property taxes. It seems municipalities are moving to allow for deferred payments and removing penalties on missed tax payments. This will help during times of reduced income but will leave households with a backlog of property tax payments when they return to work.
These are good stopgaps for homeowners. But what about renters? Its not clear whether landlords can apply for mortgage relief on rental properties, or if they would take advantage of this if they could to let tenants defer rent payments. There is no current relief for renters except through income support. Most provinces have banned eviction during the COVID-19 crisis. This helps tenants with security of tenure for the moment but those without secure income will have mounting rent arrears. Once the ban is lifted that could lead to a rash of evictions for those who cannot catch up. The income support Canada Emergency Response Benefit (CERB) program announced March 25 could assist with this dilemma.
Other costs for both renters and homeowners are utilities. These are likely to be even higher than normal with people home all day needing adequate heat and spending increasing time on screens. Those working from home require electricity and Internet access to do their jobs. Some are using this downtime to complete their to-do list of home repairs, increasing electricity use. At this point the only relief announced is that in Ontario electricity will be available at off-peak rates for all usage regardless of time of day for 45 days. Most utility companies have policies that they do not cut off service during the winter months. Some have extended the date for this into the summer and others have indicated they are willing to work with customers on flexible payment plans for arrears.
The combination of income relief programs announced by the federal government and the ability to defer mortgage payments will likely allow most homeowners to weather this crisis. Renters may struggle more. And some households are likely to have accumulated debt to work off after the crisis is over.
Jane Londerville is a Munk senior fellow with the Macdonald-Laurier Institute.