Canadian real estate buyers are jumping in head first, since the recession didn’t impact housing. However, since the beginning of the pandemic, experts said no issues would be apparent until the end of the year. The reason is a term only finance and banking nerds have been using – the deferral cliff. The deferral cliff is the expiration of programs that bought distressed owners a few extra months. Until the deferral cliff arrives, we won’t see any of the problems in the housing market. Here’s when it’s coming, and when you should see an impact.
Mortgage Deferral Cliff
The mortgage deferral cliff is when payment deferral plans begin to expire. After the pandemic driven shutdown, Canadian and US governments scrambled to get banks to defer mortgage payments for the unemployed. Starting in April, people without income were allowed to delay payments for up to 6 months. This eliminated the spike in arrears we would normally see during a recession. It also happens to restrain inventory from hitting the market. As the six month deferral period ends, homeowners that aren’t back on their feet, are going to have to deal with their housing woes.
Industry experts warned mortgage deferrals give a false sense of security. Since people haven’t seen any defaults or distressed sales, moral hazard was created. That is, people now think housing markets have no risk. However, this is only temporary. As these deferrals expire, we approach the cliff. Once we get there, a significant number of people that haven’t got back on their feet will start to
Most Canadian Mortgage Payment Deferrals Will Expire In October
Since the longest deferrals are six months, we don’t really see any issues pop up until October. In October, about ~500,000 mortgages should expire. Followed by another 221,000 in November, and a big dip lower to 15,000 in December. There’s a mild bump higher with 24,000 in January, and February won’t be known until the cut off is reached next month.
Canadian Mortgage Deferral Cliff
The estimated number of expirations of payment deferrals for Canadian mortgages.Oct 2020Nov 2020Dec 2020Jan 20210100,000200,000300,000400,000500,000Mortgages
Source: Bank filings, Better Dwelling.
Now, don’t confuse the expiration of payment deferrals with a spike in arrears rates. It takes 90 days of non-payment for a mortgage to fall into arrears. This means October’s surge wouldn’t see any contribution to arrears until January. November would be in February, etc… That said, rising arrear rates depend on liquidity.
If you can’t afford your home, what’s the first thing you do? List it for sale. The inability to pay doesn’t always turn into defaults when there’s buyers. Instead, people list their homes for sale and hope it sells and closes before the lender tries to claim it. Unless you’re not all that smart, this is the first thing you would look to do. In which case, we should see a spike in inventory first.
TORONTO — Hundreds of thousands of Canadians have been negotiating with lenders over the past few months, hoping to hold off paying debt amid the COVID-19 pandemic.
Now, those payments are beginning to filter through the credit reporting system.
“We have seen the average number of accounts that are in a payment deferral status triple since before the pandemic,” says Eva Wong, co-founder and chief operating officer of Borrowell, which offers free credit scores and reports.
“It shouldn’t impact the credit score, but it should show up on the credit report.”
The Canadian Bankers Association said that as of June 30, 760,000 account holders had negotiated mortgage deferrals or skipped payments, while 445,000 had requested deferral for credit card debt.
According to Equifax, deferred payments — many agreed to as part of COVID-19 relief programs — don’t harm borrowers’ credit scores. But the payments must be reported in a certain way, and the status of these payments may not get reported to Equifax for up to 30 days.
It’s important to make sure these deferred payments are reported correctly to credit bureaus, because even one false late payment can drop a credit score by as much as 150 points, says Wong. Credit scores are used not only by lenders, but also checked by cellphone carriers, employers and landlords, Wong says. Because it takes time to correct a credit score error, waiting until you “need” your high credit score is a risky move, she says.
“Depending on the type of error, the longer it persists, the more negative the impact,” says Wong. “If it’s showing up as a late payment and it goes to month two, then it’s two months of missed payments as opposed to just one. So I would encourage people to check their credit report and make sure that everything on there looks right.”
Anne Arbour, a financial educator at the Credit Counselling Society in Toronto, says that Canada’s two credit-reporting agencies, Equifax Canada and TransUnion Canada, are data aggregators, and it is up to the lenders to create policies on how they report the deferred payments. It’s important for consumers to get clear documentation of their agreement with their lender — such as a bank — when it comes to how they are reporting deferred payments, she says.
“Get as much detail from the lender, from the creditor, as possible about what a deferral will mean and what their practices as far as reporting it — so, whether it will impact somebody’s rating or their score or not,” says Arbour. “And if there is any issue or concern, deal with the creditor first, getting as much written information as possible.”
Arbour noted that deferrals are not an automatic license to skip payments — not only must a formal agreement be struck, but many lenders may have explicit instructions on how interest or even late fees accrues while payments are halted.
Taylor Little, chief of Vancouver-based alternative lender, Neighbourhood Holdings, says that many people skipped payments based on reading about deferral programs, without actually checking to make sure whether the lender was offering deferrals or some other type of payment plan instead. Doing that can hurt a credit score, and likely won’t be counted as an error, he says.
When checking with lenders, Arbour says people should collect a copy of the agreement, a file ID or reference number, and the name of the agent with whom they spoke, in case this information is needed to file a credit score dispute down the road.
If a consumer notices something that might be wrong on their credit score —such as a deferred payment being counted as “late” — the lender is once again the first stop, she says.
“Going back to the creditor themselves is a good first step,” she says. “[Equifax and TransUnion] have worked closely with the Canadian Bankers Association, with the lenders, everybody to try and come up with a way to report any deferrals, whether it was mortgages or credit cards, in a way that wouldn’t penalize the consumer. But the onus ultimately was on and is on the creditors to change their systems.”
In addition to requesting a fix from the lender, consumers can ask Equifax or TransUnion to investigate a mismarked payment, through a credit report update form or investigation request form. Separately, consumers can also now put a “consumer statement” to a credit report to signal to lenders that something is being disputed. Equifax Canada gives an example: “Be advised that the negative accounts on my credit report are related to the Covid-19 pandemic. I intend to make these up as soon as I can find a job.”
Keeping on top of errors — and being quick to correct them if they happen — is easier if consumers stick with a routine and understand the parts of the credit scoring process, says Arbour. For example, free services that offer credit monitoring offer more frequent updates and are different from Equifax or TransUnion’s free yearly reports. Those annual reports from Equifax or TransUnion are also different from the formal scores checked by lenders in a “hard” credit check, she says.
She advised that consumers can take advantage of both credit monitoring services and free yearly reports.
“There’s no sort of one size fits all answer — very often mortgages don’t actually appear on credit reports,” says Arbour. “[Mismarked deferrals] haven’t been brought up as a concern just yet. . . . I think come September, it might be a different story. Once deferrals are over, unless people are checking their credit report, they won’t notice it unless they’re in a situation where they’re having to renew their term or renegotiate a rate or a debt management program.”
Source: Anita Balakrishnan, The Canadian Press – August 13, 2020
The pause in mortgage payments are giving people a chance to get back to work.
TORONTO — A Bank of Canada economist says the current economic recovery could be different than the recovery from the financial crisis of 2008.
Mikael Khan, the Bank of Canada’s director of financial stability, said that while the employment rate has fallen due to the pandemic, house prices are recovering and keeping homeowners from filing for insolvency.
Khan said breaks from mortgage payments have bought homeowners some time to get back to work amid the COVID-19 pandemic and economic downturn.
“The fact that these deferrals have been available is really, really important,” said Khan. “Ultimately, what matters most when it comes to defaults is people having a job, having their incomes. What the deferrals are doing is they’re essentially buying time for that process to unfold.”
Khan, who spoke at the Move Smartly Toronto Real Estate Summit on Monday, has been studying mortgage defaults. He compared the COVID-19 pandemic to a natural disaster, such as the 2016 wildfires in Fort McMurray, Alta., which also involved a mortgage deferral recovery plan.
Bank of Canada research found that while the wildfires caused a bigger spike in employment insurance filings than the 2008 recession, the EI trend reversed much faster after the fires than in 2008.
The 2008 conditions set off a lengthy recession due to “an underlying fragility in the global financial system,” the research suggested. But the wildfires, like the COVID-19 pandemic, were a sudden shock.
“One thing that’s always very important when you’re facing a large negative shock is the initial conditions,” said Khan.
“In Fort McMurray, when the wildfires hit, that’s an area that had already been struggling for some time with the decline in oil prices that had occurred about a year or so prior, so financial stress was quite high,” Khan said.
“Now, at the national level, what we’ve been concerned about for many, many years is the high level of household debt. That’s the No. 1 pre-existing condition that was there when the pandemic struck.”
While there are some parallels, the rebuilding process from a pandemic remains more uncertain compared to a wildfire, the research said. Khan cited increased savings rates as an example of a fundamental shift with potential to affect how quickly the economy recovers from COVID-19.
Watch: Expect interest rates to stay low for “a long time,” the Bank of Canada says. Story continues below.
Over the past few months, some have warned that it could lead to a deferral cliff once benefits —such as Canada Emergency Response Benefit and mortgage deferrals — run out.
“When it comes to bumpiness in the recovery … this question that has been in the background of most of our discussions is, ‘To what extent will we see defaults or insolvencies?’” said Khan. “I think it’s reasonable to expect some sort of increase. What we’d be concerned about, there, is a very large-scale increase.”
Khan said that when a mortgage is in default, it can be caused by a “dual trigger” of both unemployment and large decline in house prices. Home prices in many areas have recovered since the start of the pandemic, Khan said. The job market’s recovery will be key to determining the impact of mortgage deferrals, said Bank of Canada research cited by Khan.
Softening population growth from immigration could start to weaken house prices in the future. But for now, Khan said, it wouldn’t make sense for homeowners with healthy home equity to file for insolvency.
“Even in cases where a homeowner simply can’t make their mortgage payments anymore — as long as they have equity in their homes and the housing market is relatively stable — there’s always the option to simply sell without kind of resorting to those sorts of measures,” said Khan.
Source: This report by The Canadian Press was first published July 20, 2020.
Fast-forward to April 2020, at which point COVID-19 public health and safety measures had been in effect for a full month and a number of home buyers and sellers opted to remain on the sidelines. Home sale activity slowed considerably, with double digit sales declines in the City of Toronto in April. For the condo apartment segment in particular, the dip in y-o-y sales in April was a steep 70 per cent.
To understand how COVID-19 measures impacted real estate market dynamics, particularly condo apartment prices in the City of Toronto, Zoocasa used data from the Toronto Regional Real Estate Board (TRREB) to compare how median prices changed between February and April 2020 for 35 city neighbourhoods. For neighbourhoods with at least 10 condo apartment sales in April, Zoocasa calculated the dollar and percentage change in the median sold price to get a snapshot of how the market evolved one month after COVID-19 measures were introduced.
The median condo apartment price is defined as the price at which half the condo apartments in an area sold at a higher price than the median, and the other half sold at a price lower than the median price.
City of Toronto Median Condo Price Fell by $65,000 Since February 2020
For the City of Toronto as a whole, the median condo apartment price declined a steep $65,000 (-10 per cent) between February and April 2020 to $574,000. In a true reflection of economic and healthcare measures in place for COVID-19, condo apartment sales dropped 64 per cent since February, with just 482 transactions taking place across the city in April compared to 1,335 in February.
A closer look at all 35 City of Toronto neighbourhoods revealed that 21 city neighbourhoods had fewer than 10 sales during the month of April, which is three times the number of neighbourhoods with a low sales volume in February. In the 14 neighbourhoods with at least 10 sales, the median condo price rose in just one neighbourhood, and fell in all the others. More specifically, the median condo apartment price:
Dropped more than $100,000 in two neighbourhoods
Fell between $50,000 – $100,000 in four neighbourhoods
Declined between $1 – $50,000 in seven neighbourhoods
Rose $34,000 in one neighbourhood to $506,500
Toronto Centre Neighbourhoods Saw Largest Price Declines
Condo apartment prices were significantly impacted in Toronto Centre, with the top five neighbourhoods with the greatest price declines (and at least 10 sales) located in this part of the city. C10 (Mount Pleasant East) topped the list with the median condo apartment price declining $131,500 (-18 per cent) to $617,500.
This was followed by C08 (Regent Park, St. James Town, and Corktown), where the median price dropped $103,400 (-14 per cent) to $611,600. In C14 (Newtonbrooke East, Willowdale East), the median condo apartment price declined 12 per cent to $597,950, marking an $85,050 drop since February. C07 (Willowdale West, Lansing-Wesrgate) and C01 (Downtown, CityPlace, Trinity-Bellwoods, and Harbord Village) rounded out the top five neighbourhoods with price declines of $70,000 and $60,500 respectively.
Emma Pace, a Zoocasa agent in the City of Toronto, noted that new market conditions since COVID-19 have created opportunities for buyers who may have previously remained on the sidelines. Pace said, “due to the competitive nature of the market subsiding, qualified buyers who may have otherwise forgone an attempt at a home search even four to eight weeks ago are now reviewing how they can participate and starting to enter the market.”
Median Condo Apartment Price Rose in One Toronto East Neighbourhood; Prices Fell in Two
When considering neighbourhoods with at least 10 condo apartment sales in April, Toronto East neighbourhoods fall in the middle of the pack when it comes to price declines. The median condo apartment price in E09 (Morningside, Woburn, Bendale) declined exactly $50,000 (-10 per cent) since February to $465,000, and dropped $47,750 (-10 per cent) in E04 (Dorset Park, Kennedy Park).
In E07 (Milliken, Agincourt North) on the other hand, the median price rose by $34,500 (+7 per cent) to $506,000. Of all City of Toronto neighbourhoods with at least 10 condo apartment sales in April, this was the only area that experienced a median price increase. Here, condo apartment sales were down 49 per cent compared to February, representing a less severe sales drop when compared to the City of Toronto’s overall sales decline of 64 per cent for condo apartments.
According to Jelani Smith, a Toronto Zoocasa agent with experience working in Scarborough, showings began to pick up toward the end of April as more buyers started to return to the market. “Properties that were sitting on the market for almost a month started to get sold relatively faster, since showings started to pick up. In some cases, I’ve been involved in bidding wars similar to what we saw before COVID-19,” said Smith.
Median Condo Apartment Prices in Toronto West Neighbourhoods Declined Between $15,000-$45,000
In Toronto West, median condo apartment prices dropped between four per cent and 10 percent since February 2020 in the following neighborhoods with at least 10 sales:
W10 (Rexdale-Kipling, West Humber-Claireville) prices declined $44,500 (-10 per cent) to $418,000
W06 (Mimico, Alderwood) prices dropped $35,500 (-6 per cent) to $577,500
W08 (Islington-City Centre West, Eringate-Centennial-West Deane) prices fell by $25,500 (-4 per cent) to $570,000
W04 (Yorkdale-Glen Park, Weston) prices declined $18,450 (-4 per cent) to $479,000
W05 (Black Creek, York University Heights) prices fell $15,451 (-4 per cent) to $409,999
Carlos Moniz, a Zoocasa agent with Etobicoke and Toronto West expertise noted that when COVID-19 hit, many buyers in the very early stages of their home searches took a step back and slowed down their searches to get a better sense of the impact on the market. According to Moniz, buyers who were further along in their home search recognized this as an opportunity to regain some negotiating power in these new market conditions where there were fewer buyers and less competition.
Here’s a snapshot of how median condo apartment prices changed in Toronto’s 35 neighbourhoods between February and April 2020, including a list of the neighbourhoods with the largest declines. Note: the percentage change in median price is only calculated for neighbourhoods with at least 10 condo apartment sales.
Toronto Neighbourhoods with the Largest Declines in Median Condo Apartment Prices
Based on neighbourhoods with at least 10 condo apartment sales in April 2020.
1. C10 – Mount Pleasant East
Condo apt median price, Apr 2020: $617,500
Condo apt median price change from Feb 2020: -$131,500 (-18%)
Condo apt sales, Apr vs. Feb 2020: 16 vs. 37 (-57%)
2. C08 – Regent Park, St. James Town, Corktown
Condo apt median price, Apr 2020: $611,600
Condo apt median price change from Feb 2020: -$103,400 (-14%)
Condo apt sales, Apr vs. Feb 2020: 74 vs. 127 (-42%)
3. C14 – Newtonbrooke East, Willowdale East
Condo apt median price, Apr 2020: $597,950
Condo apt median price change from Feb 2020: -$85,050 (-12%)
Condo apt sales, Apr vs. Feb 2020: 28 vs. 70 (-60%)
4. C07 – Willowdale West, Lansing-Westgate
Condo apt median price, Apr 2020: $580,000
Condo apt median price change from Feb 2020: -$70,000 (-11%)
Condo apt sales, Apr vs. Feb 2020: 11 vs. 57 (-81%)
5. C01 – Downtown, Entertainment District, CityPlace, Trinity-Bellwoods
Condo apt median price, Apr 2020: $677,500
Condo apt median price change from Feb 2020: -$60,500 (-8%)
Condo apt sales, Apr vs. Feb 2020: 106 vs. 330 (-68%)
Median condo apartment prices and sales for April 2020 and February 2020 were sourced from the Toronto Regional Real Estate Board.
The median price is the price at which half the homes in an area were sold at a higher price and half the homes were sold at a lower price.
The percentage change in median price is only calculated for areas with 10 or more condo apartment sales.
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.
Dalia Barsoum, president and principal broker at Streetwise Mortgages, says that investors should consider alternatives to mortgage deferrals. She explained that these deferrals aren’t 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’s credit. Barsoum says despite the pain investors are feeling, they shouldn’t just take mortgage deferment as their first line of support.
“We look at mortgage deferrals as a last resort tool for investors to utilize to help ease financial destress,” Barsoum says.
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’s 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’s 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.
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.
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’s ability to qualify for future financing, especially if their new payments are higher across several properties within the portfolio.
Though a deferral is different from a default, and should not have any negative impact on credit, that requires an adjustment to lenders’ 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.
“If 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,” Barsoum says. “Further, if you have chosen to defer by now, then please monitor your credit report for the next 3 months.”
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 “can or can’t” afford the payment. In such a binary situation, taking the deferment puts you in the “can’t pay” camp, which carried long-term implications.
“My suggestion is to first examine your finances, challenges and plans with your current mortgage advisor,” Barsoum says. “Come 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.”
Source: Canadian Real Estate News – by David Kitai 06 May 2020
Nearly 600,000 Canadians have so far taken advantage of some form of mortgage deferral assistance due to the COVID-19 crisis, according to the Canadian Bankers Association (CBC).
With the average mortgage payment amounting to $1,326, this has freed up roughly $778 million per month, according to the Canada Mortgage and Housing Corporation.
“This keeps money in the pockets of people who need it now,” the CBA noted. “Banks have publicly reported that more than 90% of those seeking a deferral are approved.”
But, of course, taking advantage of mortgage payment deferrals naturally comes at a cost. And that has been calculated at up to $12,000 in extra interest costs for those taking the full six-month deferrals, according to math from Integrated Mortgage Planners Inc. mortgage broker Dave Larock, published recently in the Globe and Mail.
Mortgage deferral costs for someone with a mortgage rate of 3% and amortized over 25 years (and assuming they just bought a house and immediately deferred payments) would amount to $2,082 in additional interest for a one-month deferral, $6,217 for six months and $12,346 for a six-month deferral, when added back into the life of the mortgage and assuming no extra repayments.
House Sales Down 14% in March
Home sales were down 14% nationally in March on the heels of the COVID-19 pandemic, according to the Canadian Real Estate Association (CREA).
The declines in sales volumes varied by region, with drops of up to 24.9% in Hamilton-Burlington, 20.8% in the Greater Toronto Area, 26.3% in Calgary and 7.9% in Ottawa.
“March 2020 will be remembered around the planet for a long time,” said Jason Stephen, president of CREA. “Canadian home sales and listings were increasing heading into what was expected to be a busy spring [but] after Friday the 13th, everything went sideways.”
Average prices came in at $540,000, unchanged from February and up 12.5% from last year. Excluding the higher priced markets of the Greater Toronto and Vancouver Areas, the average price comes in at $410,000.
Looking ahead to April, CREA senior economist Shawn Cathcart said this: “Preliminary data from the first week of April suggest both sales and new listings were only about half of what would be normal for that time of year.”
Mortgage Rates Falling
After a recent rise in fixed mortgage rates, they have since started to fall back down, with a number of big lenders cutting rates between 5 and 20 bps.
Rates are declining due to falling bond yields (which lead fixed mortgages), as well as a decline in risk premium costs for borrowers, according to a recent post on RateSpy.com.
“…the trend implies we could see conventional 5-year fixed rates dip at least 20 more basis points (under 2.50%), if funding costs don’t shoot much higher,” the rate-comparison site noted. “Few would have expected that a month ago. At the time, spooked investors were forcing banks to pay far more for their funding. Since then, the Bank of Canada, Finance Department and CMHC have committed to buying hundreds of billions in money market instruments, bonds and mortgage securities, putting a lid on rates.”
HELOC Borrowing Down
Home Equity Line of Credit (HELOC) borrowing growth continued to decelerate in February, falling to a rate of 1.6% year-over-year, according to data from OSFI.
That’s down from an annual rate of more than 7% in 2018.
“Despite the overall stabilization of home prices in recent years, HELOC borrowing has been persistently slowing since the start of 2019, noted a recent Scotiabank report. “It is unclear if borrowing has been actively declining due to a change of consumer preferences or due to limited ease of accessing these funds.”
Overall mortgage growth remained strong in February, although that will certainly decline as data post-COVID-19 starts to roll in.
“Recent economic turmoil will likely lead to weaker mortgage credit growth in the months ahead,” Scotiabank noted. “In March, the Canadian labour market lost over 1 million jobs and home sales rapidly declined in the month. Mortgage credit growth is expected to stall in the coming months as the Canadian economy remains impacted by the pandemic.”
Last week, the President of the Canadian Bankers Association announced that all six major banks would offer deferral payments on their mortgages and other credit products. Just like many public announcements over the last couple of months, many were left with more questions than answers.
One question that still has yet to be answered is, how deferred mortgage payments might affect your credit score? Equifax recently announced, “In the event that a [lender] makes a credit relief or payment deferral program available to its consumers to opt out of making monthly payments during the pandemic, Equifax’s expectation is that the [lender] would take actions on its system to ensure that it does not report any derogatory/missed payment information to the credit bureaus that is misaligned with the program it has implemented.”
Scott Hannah, B.C.-based CEO of the non-profit Credit Counselling Society, was quoted in the Globe and Mail as saying, “I don’t see creditors punishing consumers for being as responsible as they can under circumstances beyond their control.”
Many financial professionals have been posting messages online and sending emails to reassure the public and their clients that a deferral payment will not affect their credit score.
I agree that Canadians should not have their credit affected by deferred payments, although I predict a much different reality for consumers starting April 1. Lenders update the payment history of each credit account electronically to Equifax and TransUnion.
In order for these deferred payments to not be reported to the credit reporting agencies as late, as Equifax alluded too, the lender would need to “take actions on its system to ensure that it does not report any derogatory/missed payment information to the credit bureaus.”
Lenders big and small have been bombarded with phone calls that have put pressure on their personal and electronic systems. Are you willing to gamble your credit score and assume that every lender has updated its reporting system?
Millions of Canadians have found errors in their credit reports. For over a decade, I personally have received thousands of calls from consumers stating that a customer service rep told them one thing, only to find out that it was reported incorrect on their credit report.
In reality, it doesn’t matter what the customer service rep, the government, or what the industry experts tell you. If the lender’s internal system sees it as a late payment, that is how it will report. No one will know for sure if all these deferred payments will report correctly or not.
We can all agree that the amount of deferred payments over the coming months is unprecedented. For this reason, I expect an increase in the amount of mortgage, loan and credit card payments reporting incorrectly on Canadian credit reports.
Even with the chance that a deferred payment will show up as a late payment, many Canadians will still need to take advantage of such programs being offered by banks.
For those that don’t really need to defer their payments this month, I suggest you wait until it is necessary. A deferred payment is not free money. You will have to pay the lender back with interest.
Any delay is just going to increase the amount on future required payments. My hope is that, going forward, underwriters or those reviewing credit applications will be lenient on any late payments during the COVID-19 pandemic.
However, I am positive that the credit scoring system will not show much sympathy. On average, one late payment will drop your score 20 to 40 points.
A low credit score, regardless if it was caused by an error or not, will make it much more difficult to qualify for best-rate financing, renting, some employment opportunities and discounted insurance premiums. This is not to say your life will be over, but it will take at least 6 to 12 months for your credit to recover.
For those who have no choice but to request a deferred payment, here are some ways to protect your credit.
Request electronic or written confirmation that the payment is being deferred.
Ask for the employee number or service rep’s name that confirmed your deferred payment.
Write down the day and time you talked to the customer service rep.
Place all supporting documentation and record keeping in a safe place where you will actually remember where to find it.
Track both your Equifax and TransUnion credit reports for at least the next few months
If you do see an error, reach out to your lender and the credit reporting agencies to open up a dispute.
I’m sure the thought of making another call might be overwhelming for the hundreds of thousands of Canadians who have already spent hours on the phone to request the deferred payment.
For anyone who has something better to do than to spend hours listening to the annoying automated voice and elevator music, I suggest you start with suggestion number three.
I don’t want to create panic or be like Chicken Little saying the sky is falling. The point I sincerely want to get across is that reporting errors are common and always have been.
It is unrealistic to think there won’t be any errors as a result of the increased demand for deferred payments. Regardless of what happens, now is the perfect time to monitor and learn how to better protect your credit.