All About Mortgage Payment Deferrals
Q: What Does Payment Deferral Mean?
A) You don’t have to pay your mortgage payment.
Please note that payment deferrals are on a
case-by-case basis and at this time, borrowers are not automatically eligible.
Lenders will be working with their clients to cope with the economic fallout of the virus. For Canada’s 6 big banks, lenders have stated that they would allow up to 6 months of deferrals of mortgage payments.
Other national lenders (First National, RMG, Lendwise, Home Trust etc.) and Credit Unions, are also allowing clients to miss payments or defer payments. There is no set allowance yet.
Will it Hurt my Credit Score?
There is a CBC article going around about the potential for credit scores being bruised with deferred payments.
However, if you get permission to defer payments, there will be no hit to your credit score!
Please be sure to pay all mortgage payments going forward unless specifically noted by your lender.
Should I Defer Payments?
If you need to then yes, you should defer. If not, then try to hold on for a few more weeks/months.
Please note: when you defer payments, the lender will take the interest that would have been paid and add it to your monthly mortgage balance. This means that you’re going to be paying interest upon compounded interest. In the end, your balance at maturity will be higher, and you will have paid less off of your principal balance.
However, this is a small price to pay to feel more financially secure in your home.
How do I Defer Payments?
There are 3 ways to defer payments:
1. Call Your Lender
2. Message/Email Your Lender
3. Walk to a Branch (only for banks/credit union)
Please remember that payment deferrals are done on a case-by-case basis.
Right now, lenders are being inundated with calls and requests for, among other things, payment relief on mortgages.
From anecdotal evidence from clients who contact me, there are long (extremely long) wait times when calling their lenders for information. The lenders say “talk to your bank” but my advice is to wait a few days to even a week or more to contact them. This is a fluid situation and more time will allow for better service and new developments to take place.
Other Ways Lenders/Brokers Can Help!
Unfortunately, lenders do not allow brokers to help with payment deferrals. However, depending on your lender and insurer (if applicable) there may be other options available to you, such as:
- Re-amortization of the loan
- Capitalization of outstanding interest & costs
- Restructure mortgage
- Other special payment arrangements
- Deferment of Payments
Also, if your mortgage is insured, CMHC, Canada Guaranty, and Genworth have assistance programs to help their lenders and you in these times.
Mortgage Deferral Cost – Example
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 the 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
The below is what your normal 5 year term would look like…
Term Total Payments: $141,820
Principal Paid: $72,709 (51.3% of payments)
Interest Paid: $69,111 (48.7% of payments)
Term End Balance: $427,291
And below is what your 5 year term would look like if you deferred 1 month of mortgage payments.
Term Total Payments: $139,456 ($2,364)
Principal Paid: $71,301 ($1,408)
Interest Paid: $68,155 ($955)
Term End Balance: $429,871 (2,581)
The difference above is $217. This is roughly $211 above.
Below a 5 year term if you deferred SIX months of mortgage payments.
Term Total Payments: $139,456 ($14,182)
Principal Paid: $63,239 ($8,310)
Interest Paid: $68,155 ($5,872)
Term End Balance: $442,663 (15,372)
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 less than 6 x 211 due to the fact that there are fewer months remaining for the 2nd – 6th months of mortgage payment deferrals.