This is an uncertain time of trying to take care of our loved ones, help our neighbours and somehow make ends meet with less income. Part of managing through a crisis like this, financially, can be a challenge. There are ways you can get the help you need. For example, you can obtain additional income support, ask creditors to reduce payments or just reduce spending. If that isn’t enough then deferring your mortgage payments is a strategy you can consider.
As of April 4th, the Canadian Bankers Association reports that almost 500,000 requests for mortgage payment deferrals have been requested from the six largest banks in Canada. You are not alone when considering this option.
However, James McNeill of Mortgage Broker Centum Mortgage Professionals Corp., says it’s important to fully understand what agreeing to a deferred mortgage payment means to you in the long-term.
“I am not trying to persuade people that deferring mortgage payments is the wrong decision at this time,” says McNeill. “However, I would like people to understand the cost. Many people have contacted me under the false impression that their lender is forgiving six months’ worth of payments. This is not the case. Your deferred payment is still compounding interest. That interest is then added to the amount owing. So basically, you will be paying interest on interest.”
For example, if you had a $500,000 mortgage at 3.75% on a 25-year amortization, your monthly payment would be $2,570. Deferring that payment for six months would cost you, out of pocket, $15,420 right now. Over the next 25 years the interest portion of those payments would cost you $48,072.
The media is reporting that banks are dealing with each request on a case by case basis. McNeill says there are a few ways to claw back some of that interest cost. First consider making a request to your lender that you will just pay the interest portion of your mortgage payment. Then, when this crisis has passed, try to double up a payment at least once or twice per year. If you are paying your mortgage monthly, at the end of your present term see if you can change your payment to “bi-weekly accelerated” when negotiating the next term with your lender.
Considering the current crisis we are in, most banks have said that skipping a payment at this time will not harm your credit score. But McNeill advises to confirm the terms of your agreement and keep detailed records in writing for future reference.
“We are all in uncharted waters,” says McNeill. “Use this time to take action. Educate yourself on what you qualify for and make a point of submitting applications. Understand that due to the virus most places have reduced staff and the sheer volume of requests has overwhelmed institutions and government offices. Be patient and diligent we will all get through this.”