Ellen Roseman: The true cost of COVID-19 payment deferrals

In response to the COVID-19 outbreak, banks are working with customers whose employment income has dropped and who can’t make up the gap with emergency government benefits.

Most Canadian banks, and many credit unions, are reducing credit card interest rates, deferring payments, and instituting low minimum payments on credit cards and lines of credit. They’re also offering mortgage payment relief to customers by way of deferred mortgage payments.

Larger banks have provided help through mortgage deferrals or skip-a-payment to more than 710,000 Canadians (as of April 22). And about 90% of customers seeking mortgage deferral are approved, says the Canadian Bankers Association.

Deferral of mortgage payments is available for an indefinite period. There is no deadline for seeking relief and customers can approach their bank as the need arises, says the CBA.

How to secure a deferral

Suppose you’re in the group affected by the new coronavirus, worrying about your ability to continue making mortgage payments, while keeping the lights on at home and putting food on the table. 

I suspect you will find a sympathetic ear when contacting your bank. But it’s important to use online communication, if you can, since banks can’t keep up with the high call volume.

The CBA also urges customers to visit their banks’ websites for the latest information, rather than calling or visiting a branch, and provides links to coronavirus support measures from the Big Six banks:

• BMO: https://www.bmo.com/main/personal/bmo-branches-coronavirus-update/
• CIBC:  https://www.cibc.com/en/personal-banking/advice-centre/covid-19.html
• National Bank: https://www.nbc.ca/personal/notice.html
• RBC: https://www.rbc.com/covid-19/
• Scotiabank: https://www.scotiabank.com/ca/en/personal/scotia-support/latest-updates.html
• TD: https://www.td.com/ca/en/personal-banking/covid-19/

Relief may not flow quickly, however, even after you reach the bank. Munaza Jamil, a single mother and front-line health care worker, wrote to me about her runaround.

“I am in tears dealing with HSBC Mastercard,” she said. “It’s about how their customer service team executes their protocols.”

Jamil spent four weeks seeking a reference number that HSBC needed to process her relief application. Then, she received a form that applied only to mortgages and lines of credit with 12-digit account numbers. 

“My 16-digit credit card number does not fit in the required field. I cannot submit the application,” she told me. 

I forwarded her email to HSBC Canada’s media contact, who promised to help. But before that happened, Jamil’s strongly worded email to customer service led to her being approved for credit card relief.

My advice: Be patient. Don’t give up in frustration. Send a message using social media channels. If all else fails, try to reach a public affairs executive at the bank.

What a mortgage deferral will really cost you

It’s also important to know what deferring mortgage and credit card payments actually means. 

Mortgage deferral is not a government program, though it’s overseen by the federal government and works through a government mortgage insurance agency (CMHC). Banks and credit unions are free to set their own terms and require customers to apply in different ways.

Deferral is not the same as forgiveness, either. Banks are not absorbing the cost of skipped payments—you are.

Michael James, a personal finance blogger based in Ottawa, writes about how mortgage deferral works using a specific example. In his view, it’s not a bad thing for a bank customer to do. 

Suppose you have 20 years left on a 3% mortgage whose current balance is $300,000. You’ve just made your monthly payment of $1,661 and the bank grants a deferral on your next six payments. What effect does this have?

To begin with, your mortgage balance will increase to $304,500 in six months. Banks can ask you to increase future payments to catch up or they can extend the amortization period with the same payments. Let’s assume it’s the latter.

“How many more payments will you have to make at the end of your mortgage to make up for the six deferred payments? The answer is just under 11,” James says. “That’s five extra payments. Keep in mind, though, that these payments will be smaller in real terms because of inflation over the next 20 years.

“An extra five payments of interest is no fun, but it’s not the end of the world. The bank isn’t doing you much of a favour, but it’s not severely punishing you either. Many people have much bigger concerns right now than a modest extension of their mortgage’s amortization.”

What a credit card deferral will really cost you

When it comes to credit cards, most banks began offering payment deferrals in late March for hard-pressed customers applying for relief. And by early April, they had slashed their credit card interest rates for deferred payments to an average of 10.99%. The usual rate is 19.9 to 20.9%. 

“What you owe doesn’t change and you’ll still be expected to make your payments once your deferral period is over,” says Stephen Weyman at Credit Card Genius. “While you can defer your payments, credit card interest will still be accruing. So, not only will your bill need to be paid in full, interest will be tacked on as well.”

So, what does this mean in real life? I found a payment deferral scenario for credit cards in a frequently asked questions list on the CIBC website: "What are some examples of payment deferral scenarios?”

Suppose you have a minimum payment of $10, plus interest and fees, for each statement. Your annual interest rate is 19.99% for purchases. 

If you’re approved for deferral, your minimum payment will be $0 for the next three statement periods (assuming you’re not over your credit limit). Starting in the fourth month, you’ll have to pay the minimum $10, plus interest and fees, for that statement. 

If you maintain a balance of $5,000 in purchases for three statements in a row, you’ll be charged interest at 19.99%—or $83.29 in interest each month. This will be added to your balance owing every month. 

On your upcoming statements, you will receive a rebate for a portion of the interest charges in those three months, resulting in an effective interest rate of 10.99% for the deferral period. 

In the fourth month, once the deferral period is over, you’ll have a minimum payment of $10, plus the interest of $83.29 for that month (calculated at the annual 19.99% interest rate) and any additional fees. 

Is deferral the right move for you?

Should you miss a few credit card payments now and pay slightly higher bills later? It depends on your attitude toward high-cost debt.

Deferral can work if you set a goal of repaying your credit card balance after the pandemic crisis. But if you habitually carry a balance from month to month and pay only the minimum, deferral should be avoided.

Linda Stern, a licensed insolvency trustee at Crowe Soberman Inc. in Toronto, has an example showing how deferral can hurt those who pay small amounts on a large credit card balance over a long period.

Suppose you owe $10,000 on a credit card with a 19.99% interest rate. You pay a reduced interest rate of 10.99% during the three months when you skipped your payments.

Your balance grows to $10,277 after three months. You pay $250 a month for the next nine months and $350 a month for the 24 months after that. And you make no new purchases during this time.

Will that be enough to wipe out your debt? Not even close. 

You’ve paid a total of $10,650 over 33 months, including $4,576.91 in interest. But here’s a surprise. You still owe $3,992.63 on your credit card account. 

It’s a shock to see how slowly the balance has come down after so many months of payments. That’s a result of the 19.99% interest rate, compounded daily. Unless you pay off credit card debt quickly, you’ll find the high interest can destroy your financial well-being.

Stern worries that for some customers, deferring credit card payments is similar to putting a bandage over a wound when stitches or surgery is required. 

“As many people watch businesses or careers they’ve spent years building crumble before their eyes, dealing with debt is out of sight, out of mind for them right now,” she says.

“When the lockdown starts to lift, government assistance will come to an end, collection activities will slowly resume and the reality of ‘how do I pay my debt?’ will likely come to light.”

For now, she recommends preparing a budget based on your current income and focusing on essential living expenses. If there are funds available to maintain the minimum loan or credit card payments, make those payments.

Then, prepare a second budget as your income gets back to former levels. And if you’re overextended with credit, put a plan into place to become solvent again. 

The options for resolving debt (credit counselling, consumer proposal, bankruptcy) are explained here by the Financial Consumer Agency of Canada (FCAC).

Credit counsellors and insolvency trustees are keen to help during the crisis, Stern points out. They hope to attract clients who aren’t working full-time and have more time to think about their finances.

“We’re not super busy. We’re not swamped,” she says. “It’s a good time to deal with your debts now.”