It has been undoubtedly moving to see people reclaim a sense of shared humanity in the weeks since COVID-19 threw the world’s population all into the same boat. But for every example of neighbours serenading each other from the rooftops, it’s not hard to find competing stories that remind us that not every trait shared by humanity is an inspiring one.
That’s the decidedly mixed sentiment being triggered by many of Canada’s Big Six banks and their recent mortgage deferral programs, which allow borrowers to put off making loan payments for up to six months as the world continues fighting the coronavirus, after a recent CBC story detailed the challenges faced by two homeowners. What was first trumpeted as a lifeline for homeowners in distress is now being framed by some borrowers as a source of “additional” interest charges that will create millions in profits for the banks at a time when the average Canadian is wondering if she’ll still have a job tomorrow.
Rather than halt interest charges during loan deferment periods, some members of the Big Six are adding them to borrowers’ outstanding balances and charging interest on the new amount. Homeowners who opt for deferment programs may rightfully feel penalized for doing little more than trying to avoid defaulting on their mortgages at a time when the Canadian economy has been largely shuttered by government order.
No surprise, then, that where once there was relief, now there is rage.
"The way they are touting the deferrals like [the banks] are our heroes in some way, all the while 'helping' us, as a country, into heaps more personal — and fabricated — debt," Toronto homeowner Amanda Merle told CBC. She says the four-month deferral she and CIBC agreed to will cost her an extra $7,400.
An out of work health care aide in Calgary, Sidra Liaqat, told CBC her six-month deferral will force her into paying an additional $5,300 in interest to RBC.
"Basically, it's just the bank profiting off this emergency," she said. "I don't think it's fair. It's not right.”
When asked for comment, representatives from RBC and the Canadian Bankers Association sent MBN boilerplate comments that were identical to the ones shared with CBC. Neither group directly addressed the topic at hand.
“[T]he cash flow freed up from the deferrals completed to date is roughly $778 million per month, or $2.3 billion per quarter. This keeps money in the pockets of people who need it now,” said the CBA’s statement, which added, somewhat ironically, comments about the importance of access to “low-cost credit, particularly during an unexpected shock”.
RBC’s comment had more to say about the relief the bank is providing its credit card clients than it did about mortgage deferrals.
The truth on mortgage deferrals
CIBC, however, addressed both the CBC story, which the bank says contains inaccuracies, and the issue of additional interest. The statement provided to MBN, in full, is below. (Emphasis added by MBN.)
At CIBC, we do not charge interest on interest during the mortgage deferral period. Clients have the option of paying accrued interest at the end of the period or adding the unpaid interest to their mortgage which would increase a monthly mortgage payment by an average of $40 based on a $300,000 mortgage at a 3% interest rate amortized over 25 years. Mortgage deferrals are helping keep thousands of dollars in the pockets of clients facing financial hardship. Those deferring mortgage payments for six months will benefit from an average of $10,000 in immediate payment relief which can help a lot at a critical time.
The emphasized text is critical, and not only because it describes options for homeowners not included in the CBC story; it speaks to the transparency the banks have used in talking to the public about mortgage deferrals and what they might cost.
“Every bank has a little bit different of a policy, but it is given to you upfront,” says DLC’s Sara Makhomet. “There’s no hidden cost or ‘I wasn’t aware this is happening.’”
And it’s not as if the situation among non-bank lenders is any different.
“It’s very, very similar,” Makhomet says, adding that she hopes other assistance options can be put in place for borrowers, particularly now that the Canadian Mortgage and Housing Corporation has in place a $50 billion fund for purchasing insured mortgages, thereby reducing the risk faced by the Big Six.
But what more can banks conceivably do?
“I don’t think, in clients’ minds, they realize how much this is costing [the banks],” says Dalia Barsoum of Streetwise Mortgages. “Should they just delay payments without earning interest? I can’t make that call, but at the end of the day, the mass request for mortgage deferrals is also impacting the rest of the people who are looking to get funding.”
Barsoum explains that as the banks’ lending reserves rapidly diminish amidst a dearth of mortgage payments they will be forced to tighten their lending practices.
“There’s not an infinite amount of money that can cover all of these deferrals and still keep the market going,” she says. Barsoum is already seeing lenders on commercial properties cut off conventional lending that lacks the backing of the CMHC. The capital that would normally grease the wheels of the economy has been vaporized.
From the banks’ perspective, it’s a complex, damned-if-you-do/damned-if-you-don’t situation. They are providing an invaluable solution for Canadian homeowners desperate for cash flow, but they must also ensure they can continue paying dividends to their investors, such as the untold number of seniors who rely on those dividends for their economic security. Those payments cannot exist in the same universe as mass mortgage forgiveness.
Homeowners, on far tighter budgets than any of the Big Six, are similarly stuck. Their options, until better ones are presented, are few.