What is the Cost of a 6-month mortgage payment deferral?
We will assume the deferral occurs in the first 6 months of the new mortgage, which is unlikely to happen but provides the most expensive case scenario. We will use the method used by most Credit Unions, and by TD Bank and others, whereby the bank will re-set you payment at the end of your current term, to have you pay back the accrued interest over the remaining entire amortization of the mortgage. This keeps the amortization period unchanged from its original length. This method is the most generous for your cash-flow, and is also the most expensive possible method.
- A $100,000 mortgage at 3.00% interest with a 25 year amortization would have a monthly payment of $473.25. We will assume it is on a 5-year term.
- If a client defers a $100,000 mortgage at 3% interest for 6 months you would accrue $1,500.00 in interest. The interest each month for those 6 months is on a static balance rather than on a declining balance, so this amount is slightly higher than the $1,490.70 in interest you would pay if the payments were not deferred.
- Once the 5-year term ends, and the mortgage renews the balance owing is higher by the accrued interest, plus interest on that accrued interest, plus the principal not paid and the interest on the principal not paid. All of that adds up to $3,266.87. You would have not made 6 payments totaling $2,839.50.
- So upon renewal the balance owing would be $88,741.17 instead of the $85,474.30 it would have been without a deferral.
- Therefore the total cost of the deferral at the end of the 5-year term would be $427.37. So the total cost of a 6-month deferral after 5 years is equal to 90% of one monthly payment.
- This assumes you pay all of that deferred money back on your mortgage at the end of that term. If you don’t then the cost will increase over time. Let’s look at that next.
- Assuming the new interest rate at renewal was unchanged at 3.00%, and renewing with a 20-year amortization, your new monthly payment would be $491.33 instead of $473.24, a difference of $18.09 per month.
- If you renewed again and again at the same interest rate until the mortgage was paid off you would have paid a total of $45,059.69 instead of $41,972.92, for a total cost of $3,086.77
TAKEAWAYS AND SUGGESTIONS:
- Taking a payment deferral on any debt is a defensive and protective move taken at a time of great uncertainty. You may need that money during this challenging economic time or you may not, but you won’t have it if you don’t take the deferrals available to you. And you likely don’t currently know if you will need it or not. If you know you will not need it, then why take it.
What We are Doing:
- We are being defensive and are protecting our financial position and our liquidity by taking deferrals on all 9 of our mortgages.
- We are depositing the entire amounts of the deferred payments each month into a separate account. We will use only of that money what we must.
- When this is over we will use the remaining money to pay down debt. We might decide to use it to pay down our HELOCS instead of our mortgages because the HELOCS have higher interest rates than the mortgages.
- That might not be the case for others, but we have very low fixed rate mortgages. And doing so will have the greatest impact in reducing our monthly payments.
Some Considerations for You:
- If you take a 6-month deferral and you put that money into a separate bank account and spend of it only what you must, and then when the dust settles you pay what is left in that account directly on that mortgage you will reduce the long-term cost of the deferral.
- Or, if when the dust settles you decide it is more important to reduce your overall monthly debt payments by the highest possible amount, then take that remaining money and pay down the debt that would reduce your monthly payments by the largest amount, or the debt with the highest interest rate.
- It’s your money. Use it in the way that best serves you.
The following information is taken from a Money Coaches Canada article
According to Vancouver based mortgage broker Marci Dean, each lender has created a policy around the deferral program. In some cases, the lenders default to a 6-month deferral and it’s up to the borrower to call/email to stop the deferral. For other lenders, it is month to month. In that case, borrowers will login or email their request to skip payment the following month.
Again, depending on the lender, interest will either be added to payments after the deferral or it will be added to the mortgage balance at the end of the term which will result in larger payments later.
Here are a few examples from bank lenders:
TD: Payments will be adjusted automatically at the start of your next term or, if you change anything else before renewal, at that time, to ensure your mortgage is paid off at the end of your original amortization period.
Scotiabank: A mortgage payment deferral means that payments are skipped for up to 6 months, during which interest is accrued to the outstanding balance of the mortgage. The amount is incorporated into the monthly payment when mortgage payments resume at the end of the deferral period.
CIBC: The interest that accrues during the deferral period will be added to the principal balance of your mortgage to provide you with immediate payment relief while experiencing temporary hardships. As a result, once payments resume, you will continue to pay interest on the principal, and your payments may increase after the deferral period.
I hope this information helps you in your decision-making and actions on your mortgage(s). Do not hesitate to call or email me for further advice.