Thinking of Deferring Your Mortgage
As of April 3, approximately half a million Canadians have already requested to defer their mortgage payments after lenders announced last month that they would offer some financial “relief”. But is deferring your mortgage actually relief?
There has been a lot written on the mortgage deferral options already but most of it leaves consumers more confused than ever.
Many of these people requesting deferrals are still under the false impression that the bank is actually forgiving a few months worth of payments which is definitely not the case. A deferred mortgage is still accruing interest and this interest will be attracting further interest on itself – something known as compounding.
So, what does a mortgage deferral really cost? Let’s look at the numbers:
For this example, we are going to use an outstanding mortgage balance of $500,000 and a fixed interest rate of 3.75 per cent for the remaining 25 years of amortization. If you continue to pay the mortgage off as is, you would be paying the following:
- $2,570 monthly payment
- $771,196 of total payments made over the 25 years
If you decide to defer the mortgage payments for the next six months, you would pay:
- Same $2,570 monthly payment but it would go for 1.5 years longer
- $819,268 of total payments over the next 26.5 years
So you would defer six months of your $2,570 per month payment which is a total of $15,420 of money you keep in your pocket right now – something that may be necessary in these very unique times. But the total cost of that deferral is an extra $48,072 of payments over the life of your mortgage.
And understand that the total extra costs to you are not $48,072 minus the $15,420 “saved”. The $48,072 figure is the overall extra amount of payments that you end up making to fully pay off your mortgage debt.
In explaining all of this, I am not trying to persuade you that a mortgage deferral is not the right decision at this time, but instead want to make sure that you fully understand how much it will cost you. Is this the best way to free up cash flow right now or are there other things to consider doing first?
In order to properly make this type of decision, consider seeking out the guidance of a professional financial planner. I understand however that for many people, accessing the services of a professional planner is not something they can readily do.
With that in mind, I am looking forward to announcing a new pro-bono financial advice program later this week that will allow anyone affected by the COVID-19 pandemic to access a no-cost 30 minute phone or videoconference session with a professional financial planner to ask these types of questions.
Stay tuned for more info!