In response to the COVID-19 crisis, companies across Canada are doing what they can to help Canadians manage. To help ease the financial stress on Canadians, the Big Six banks are offering mortgage payment deferrals for up to six months to borrowers in “good standing” whose incomes have been interrupted. Many smaller lenders are offering this as well.
While this can be a great tool if you’re in financial trouble, it’s not free. In fact, it could cost you thousands of dollars more on your mortgage. Your eligibility is also subject to approval, based on your mortgage providers’ criteria. Make sure to speak to your lender to explain your situation and discuss your options.
With that said, here’s what you need to know about the potential cost of mortgage payment deferral due to COVID-19.
Why mortgage payment deferral isn’t free
While mortgage deferral might help you in the short term, using this feature does have drawbacks. Your lender isn’t pausing all interest accumulation, it’s just pausing payments. As a result, deferring payments will see you pay more over time. This is for two reasons.
1. Future payments will increase
If you defer payments, you’ll still have to pay the balance of your mortgage off, but now within a shorter time frame. Your lender will recalculate your monthly payments when you resume regular payments, so that your mortgage will still be paid off within the original amortization period. This will result in a higher monthly payment going forward.
While extending your amortization period might be an option, it is a more involved process that may require refinancing.
- Interest is still being charged
Most banks are still going to charge interest on your mortgage, even if you’re not making payments. This means that you will have to pay additional interest on any amount you do not pay during the deferral period.
If your mortgage has 20 years left, your deferred payments will have an extra 20 years’ worth of interest charged on them. For a mortgage that only has 5 years left, missed payments will only have 5 additional years’ worth of interest charged.
How much will your mortgage deferral cost?
The best way to explain this is by looking at examples. Below are a couple of hypothetical scenarios to demonstrate how the cost of a mortgage can be affected by deferring payments. To simplify the calculations, final figures were rounded and an annual interest rate of 3% was used. Note that in reality, your mortgage rate will change at the time you renew.
Various lenders may calculate this differently, so be sure to consult with your lender to confirm how your payments will be affected.
Example 1: $500,000 mortgage amount with 20-years left
Let’s say that Gracie has a $500,000 mortgage with 20 years remaining. With a mortgage rate of 3.00%, her monthly payments are around $2,770.
- Deferring 1 month of mortgage payment: When she resumes paying her mortgage, Gracie’s monthly payments will increase by around $18. The total amount she will pay for her mortgage (balance + interest) will increase by around $900.
- Deferring 3 months of mortgage payments: When she resumes paying her mortgage, Gracie’s monthly payments will increase by around $50. The total amount she will pay for her mortgage will increase by around $2,750.
- Deferring 6 months of mortgage payments: Gracie’s monthly payments will increase by around $100. The total amount she will pay for her mortgage will increase by around $5,500.
Example 2: $245,000 with 10-years left
In this second example, Gracie started her mortgage 15 years ago, and has just 10 years left. Gracie’s current mortgage balance is $245,000. With a mortgage rate of 3.00%, her monthly payments are around.$2,365.
- Deferring 1 month of mortgage payment: When she resumes paying her mortgage, Gracie’s monthly payments will increase by around $23. The total amount she will pay for her mortgage will increase by around $370.
- Deferring 3 months of mortgage payments: When she resumes paying her mortgage, Gracie’s monthly payments will increase by around $70. The total amount she will pay for her mortgage will increase by around $1,120.
- Deferring 6 months of mortgage payments: Gracie’s monthly payments will increase by around $145. The total amount she will pay for her mortgage will increase by around $2,240.
As you can see, the fewer years you have left on your mortgage, the less total additional cost you will incur when you defer your mortgage payments. However, your monthly payments will increase more significantly, in order for your mortgage to be fully paid off within your original amortization period.
Alternatives to mortgage deferral
If your income has been affected by the COVID-19 pandemic, deferring your mortgage might seem like an easy way to free up cash. However, think it over carefully because it’s an expensive type of debt, as your mortgage will continue to accumulate interest.
If you’ve been laid off during the COVID-19 crisis and you need cash to cover your bills, you should speak to your lender and consider all of your options. In some cases, alternative sources of funding like a personal line of credit or home equity line of credit (HELOC) may be a better alternative, especially if you only need a small amount of cash to make ends meet temporarily.
The best way to figure out what’s right for your situation is to speak to your lender. They can tell you what options you are eligible for and help you calculate the costs, which will make it easier for you to decide on a course of action.
The Bottom Line
During the COVID-19 crisis, everyone has stepped up to do what they can for Canadians who have been financially impacted by the pandemic. That said, if you can still make your monthly mortgage payments, you should do so.
If you’ve been financially impacted by this crisis, mortgage deferral might take some of the pressure off of your finances, but it doesn’t come without costs. Before applying for a mortgage deferral, speak to your lender to figure out if you can qualify and whether there are other options available.
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