Loan relief may end up costing thousands more

Deferring payments now could keep many businesses afloat, but interest would still accrue

When Anthony Grande's banker at RBC called him last week to discuss relief for his business loans, something didn't add up.

The banker said Grande could skip the principal portion of his loan payments for up to six months, but the interest would still be due.

A quick calculation confirmed that if he accepted the bank's help, Grande would pay less right now, but over the course of his loan he would owe thousands of dollars more. Put another way, by offering customers "relief," banks stand to increase profits.

"This isn't really a deal. They're making more money off me if I say yes," said Grande, who runs a number of physiotherapy clinics across the GTA.

With the economy in free fall, businesses' cash has become scarce. Lowering or deferring payments now could keep many businesses afloat that might otherwise go under.

But Grande thinks it's deceptive to profit off a program that is marketed as providing relief.

"This seemed especially egregious and underhanded," he said. "It's vulture banking."

RBC spokesperson AJ Goodman would not confirm if the bank continues to charge interest during relief periods for all customers. He referred the Star to the Canadian Bankers' Association, "as this program is not unique to RBC."

When contacted by the Star, CBA spokesperson Mathieu Labrèche initially said each bank's relief program was different, but the organization later put out a statement that applies to "Canada's largest banks."

"Customers should understand that this is not mortgage forgiveness. Mortgage deferral means that payments are skipped for a defined period of time, during which interest, which would otherwise be part of the deferred payments, is added to the outstanding balance of the mortgage.

"The added interest is incorporated into the monthly payment, either when payments resume at the end of the deferral period or upon renewal at the end of the mortgage's term," reads the CBA statement.

The so-called big six banks - BMO, CIBC, National Bank, RBC, Scotiabank, and TD - reported more than $46.5 billion in profit last year.

It's unclear whether all the banks are continuing to charge interest on other financial products, such as business loans and credit cards.

After being approached by the federal government, the big six banks put out a joint statement last week stating they would provide financial relief to Canadians impacted by the economic consequences of COVID-19.

The statement said the relief would include "up to a six-month payment deferral for mortgages," and "a commitment to work with personal and small-business banking customers on a case-by-case-basis to provide flexible solutions."

Anyone considering taking a relief package from their bank on their mortgage or loan should be aware that lower payments today could mean they will end up paying more in interest. It's short-term gain for long-term pain.

Here is how it works: If you skip your mortgage payments for the next six months, the interest will continue to accrue, so you'll actually owe more when your restart your payments. This will translate in one of two ways: higher payments immediately or a larger balance on your mortgage. Either way, it will result in thousands of dollars in additional interest payments to the bank over the life of your mortgage.

For business loan customers like Grande, relief from only the principal portion of his payments would mean he still has to pay the interest, which can be more than half of the total payment, especially early in the loan. And because the principal isn't being reduced, the interest payments stay the same. In six months, he'll have exactly the same amount of principal and interest due as today, only he's paid thousands of dollars in the meantime.

"Six months extra interest on a five-year loan is 10 per cent more," Grande said. "That's the equivalent of an extra (percentage) point," on your interest rate, he said.

The Star contacted all six banks and was able to confirm that BMO, National Bank, RBC and Scotiabank will continue to charge interest on loans or mortgages if customers accept its offer to skip payments for up to six months.

On its website BMO states: "We offer up to a six-month payment deferral on mortgages, loans, credit cards and lines of credit with no fee (your payment will be deferred but interest will continue to accrue)."

BMO spokesperson James DeCosimo did not provide a comment before publication.

National Bank confirmed business clients will have to pay interest and can only postpone the principal portion of their payments for up to six months. Mortgage holders will not have to pay anything for the six-month deferral period, and their payments will not increase afterwards.

Instead, "clients will have a higher outstanding balance at the end of their term," said National Bank spokesperson Jean-François Cadieux.

RBC states on its website that mortgage holders can skip payments of both principal and interest for a month and can ask to extend this to six months.

"Your payment amount won't change during the term of your mortgage," the website states.

At RBC, personal loan payments can also be skipped for one month. "Keep in mind, skipping can affect your amortization and payment schedule," the website states.

For credit cards, RBC will continue to charge interest during the deferral period, but "the interest accruing does not get added to the interest bearing balance, so no interest is charged on interest," Goodman said.

Scotiabank will charge interest on mortgages, but would not say whether it does so on other products.

"During the time you defer your mortgage payments, interest will continue to accrue - so your payments will be slightly higher after the deferral period ends. You will pay more interest over the life of your mortgage, but a deferral will also help you with your short-term cash flow," states the Scotiabank website.

Asked for further detail, Scotiabank spokesperson Daniela Da Silva sent the Star a generic statement.

"Scotiabank is reviewing all requests on a case-by-case-basis and commits to working directly with our customers to provide relief from financial stresses due to COVID-19," it read.

CIBC and TD declined to say whether its payment deferrals included interest or not.

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This article was written by Marco Chown Oved Staff Reporter from The Toronto Star and was legally licensed by AdvisorStream through the NewsCred publisher network.