What to do if your deferral is ending and you cannot pay

Now that we’re halfway through September and a little over six months since the official declaration of a global pandemic, the six-month “vacation” that many Canadians took from their mortgage and other debt obligations is coming to an end.

By the end of June, 760,000 Canadians had put their mortgages on pause and a full 2.6 million (or roughly 10 per cent of credit consumers) had put at least one of their debt obligations on an active deferral. These deferrals were meant to help households stay financially solvent during temporary unemployment with the hope that the labour market would significantly recover by the time the deferrals expired.

To further complicate the problem, the significant government handouts will also be ending at around the same time. Just last week the latest Canadian household debt ratio numbers came out and they showed a dramatic decline from 175.4 per cent to 158.2 which sounded quite promising on the surface. But the true story here is that debt loads didn’t shrink at all during the past few months, only that disposable income went up due to all of the stimulus.

So, what happens if your deferral is about to end but you can’t afford to resume payments? Let’s look at two main scenarios and how to respond.

First, if it looks like you’ll be able to start making the payments again soon, you can consider several options.

A short-term loan or borrowing from a line of credit might be the simplest solution if you have either option available. But if you’re not fully confident that you’ll be able to start paying again soon, this could put you much farther into debt in short order.

You should also consider reaching out to your lender and explaining your situation. If you can prove that you just need a little bit more time, they may be open to extending the deferral a little longer for you. If you go this route though, be very careful to fully understand what other ramifications their extension comes with.

Second, if it looks like you are nowhere near ready to start making payments again, some additional planning is likely going to be required.

It’s very unlikely that a lender will do a significant additional deferral for you, but you should still discuss with them right away. If you wait until after you’ve missed a payment, your options will quickly dwindle.

For some, a major decision may need to be made including selling your house or filing a consumer proposal.

Selling your home may not sound to appealing but it would be much better for you to be in control of that situation instead of having your bank foreclose and sell it for you.

A consumer proposal could allow you to reduce your non-mortgage debt and stay in your home as long as you can keep making mortgage payments.

Finally, what if you chose to take a deferral to build up a emergency cash reserve and can afford to not only start re-paying, but can also put that built up reserve against your outstanding debt?

At this point, the outcome of the pandemic is nowhere near clear and a second shutdown is seeming more and more likely. Even though you’re accruing a little extra interest from the deferral, you might want to consider going back to regular payments only and sitting on that cash reserve a little longer.

Once things fully settle down, you can decide what to do with your emergency fund then.

Regardless of what position you’re in, the worst thing you can likely do is nothing. Be proactive in your financial situation, no matter how bleak it may feel and make the best decisions available to you by getting all of the information and the best advice.