The Real Cost of Mortgage Deferrals
These are unprecedented times and my gut reaction is that it’s important to feel financially secure; when your income is suffering, having to make mortgage payments does not help overall anxiety levels.
If your finances have been negatively affected by COVID-19, I believe you should defer payments. The below information may help you make a choice.
What is a Mortgage Payment Deferral?
For much more info, we wrote all about it in a previous post.
A mortgage deferral is an arrangement between you and your lender that you will suspend your mortgage payments for an agreed-on, temporary length of time.
(Lenders have determined that six months is the agreed upon max length of time.)
Once a mortgage deferral ends, your mortgage payments go back to normal.
The mortgage deferral is a pause on mortgage payments themselves, not a forgiveness of the overall mortgage obligation, which means that interest will continue to accumulate and be added to your debt. In other words, when you defer your mortgage payment, you are not paying principal (paying down your mortgage balance) nor interest (how much you owe on your mortgage balance). This interest is then added to your mortgage balance.
How Do I Defer Payments?
All you have to do is contact your lender (call, email, or use their website) and ask for a deferral. I recommend checking your lender’s website for specific information to provide, and then contacting them online. Call volumes are rather high right now… on the plus side, there’s not a lot of processing involved. I’ve had a couple of clients say it has been pretty painless. Lender contact Info.
If you have any trouble calculating your own cost, please don’t hesitate to reach out!
Mortgage Deferral Cost – Example / Explanation
For example. let’s take a mortgage of $500,000
Start Date April 1, 2018 | Original Amortization: 25 years | 5 Yr Fixed at 2.99%
Deferral quick math: Let’s defer this mortgage for one month on April 1, 2020. Using a mortgage calculator, before deferring, after 2 years, we will be left with $472,204.
An easy way to know how much interest you’re charged per month is your rate of 2.99% multiplied by $472,204 divided by 12 (this is a rough calculation and does not include compound interest). This equals $1,176 in interest (actual interest using compounding is $4 different – close enough).
OK, so we didn’t pay $1,176 in interest… this interest is added to our outstanding mortgage balance.
Now, to understand how much this one mortgage payment deferral will cost you, we multiply it by 2.99% to get ($1,176 x .0299) $35.04, or $2.93 per month. This is the monthly interest you’re charged on the foregone monthly interest you did not pay. That’s not the full story though. Since we’re NOT paying that $1,176 in interest, it gets added to our mortgage. So, you’re effectively being charged twice… once in the month you should have paid it, then again in the next month where you DO pay it. Therefore, your total interest costs are multiplied by 2.
So, 2 x $2.93/month x 36 months = $211. Therefore, deferring one mortgage payment will cost you $211 over the course of the next 3 years.
At the end of your term, your mortgage will be higher by one mortgage payment ($2,363) and the extra interest ($210). So, instead of having $472,204 left, we’re left with $429,871 (slightly different due to compounding).
Quick & Messy Calculation:
Monthly Interest = outstanding balance x interest rate (percentage) ÷ 12 months
Monthly interest on foregone Monthly Interest = Monthly Interest x interest rate ÷ 12
Term Extra Interest = monthly interest on foregone interest x 2 x months remaining.
For the example above:
Monthly Interest = $472,204 x .0299 ÷ 12 = $1,176
Monthly interest on interest = $1,176 x .0299 ÷ 12 = $2.93
Term Extra Interest = $2.93 x 2 x 36 = $211
* I completely understand that this is over the TERM and not the whole amortization/life of your mortgage. If it were over the whole life of your mortgage, costs could be 10x higher or more… However, from my experience, borrowers change their mortgage often enough that assuming you will pay the same interest rate, same payment, and same amortization is a moot point.
I could do the math for you over the term/life of your mortgage. Or, you can use RBC’s handy “skip a payment” calculator, but I don’t find this info that useful.
Mortgage Term Comparison
Looking again at $500,000, 2.99%, 25 years amortization mortgage. The below is what your normal 5 year term would look like…
Term Total Payments:
Term End Balance:
And below is what your 5 year term would look like if you deferred 1 month of mortgage payments.
Term Total Payments:
Term End Balance:
The difference above is $217 (2,364 less payments vs $2,581 more in principal). This is roughly the $211 above.
Below a 5 year term if you deferred SIX month of mortgage payments.
Term Total Payments:
Term End Balance:
The difference above is $1,190. IE, at the end of your term, you would have had paid $14,182 less, but be left a $15,372 higher outstanding balance.
This amount is close but less than 6 x 211 due to the fact that there are fewer months remaining for the 2nd – 6th months of mortgage payment deferrals.
Please let us know how we can help you or someone you care about, or if we can answer any of your questions!
I pasted the below from TD’s mortgage deferral website. Their info is well laid out.
Should I defer my mortgage payments?
Individuals considering this option should give it careful thought: think about how it will impact their own situation and recall that the program is designed to alleviate temporary hardship due to the impact of COVID-19. Depending on the current position of your finances, it may be better to continue with your mortgage payments. If you think your unemployment or debt situation could be longer term, you might wish to discuss other options that may be available.
What should I consider before deferring my mortgage?
In order to determine whether the mortgage deferral program is for right for you, consider the following:
- Your current spending. Now is a good time to make a distinction between what is discretionary and what isn’t, what you have to pay for and what you can get by without.
- All of your debts. From your mortgage to your credit card bills, make sure you are prioritizing your debt properly. Cash saved by not paying a mortgage could, for instance, go towards paying down credit cards, even just the minimum.
- Are other bills being deferred during this period, such as property taxes? You may also be eligible for other COVID-19 government relief programs.
- Check your cash flow and see what you are expecting to receive in the near future. Our Personal Cash Flow Calculator can help get a better idea of where you spend your money.
If you really are in a predicament because of the COVID-19 crisis where the disruption of cash flow is preventing you from making a mortgage payment, a deferral might be your best route.
What can I expect at the end of my six-month mortgage deferral term?
When things do get “back to normal,” remember that the total amount owing on your mortgage will be higher, due to the interest that has accrued. In that case, you might wonder how you will “catch up.” In the case of TD, your 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. You can speak with your financial provider to see what other options may be available, including the potential for a lump sum payment or increasing your payments to help you get back on track sooner.
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