Mortgage payment deferrals are an essential lifeline being made available to Canadians during a difficult time.
Early April reports by the Canadian Banking Association indicate that more than 600,000 Canadians have requested mortgage payment deferrals. The average Canadian mortgage payment is $1,326/mth. This puts an estimated $778 million per month into the hands of Canadians who need it most.
There is no doubt that having the flexibility and option to forego a mortgage payment to keep food on the table is making a difference in people’s lives.
However, the opportunity to defer mortgage payments comes at a cost down the road.
What does it cost to defer a mortgage payment?
The short term relief comes at a long term expense.
When you defer your mortgage payment the interest that is due with each monthly payment gets added to the outstanding balance of your mortgage. This means that when you start your mortgage payments again at the end of the deferral period your outstanding balance will be higher.
Let’s look at a simple example for illustration purposes:
Let’s assume you have a $100,000 balance on your mortgage and your monthly payments are $1,000.
Approximately $500 of your monthly payment goes to principal reduction and $500 to pay the interest over the past 30 days.
If you defer your mortgage for 6 months then your new balance when you start paying your mortgage again will be $103,000.
6 months x $500 = $3,000 plus your outstanding $100,000 balance.
Based on initial data provided by the Canadian Banking Association the national average for mortgage payments is $1,326/mth which translates into about $416/mth in interest.
In markets like Toronto and Vancouver where the average mortgage is much higher than the national average theses numbers are much higher.
How can I avoid the long term costs of a mortgage payment deferral?
You can avoid the extra unwanted interest cost with this simple method.
If your household income allows, budget to save the equivalent of the interest portion of your mortgage payment.
At the end of the 6 month deferral you can take advantage of your mortgage’s pre-payment privilege and make a lump sum payment to the balance. This would allow you to pick up where you left off with your mortgage and avoid all the extra interest expense.
Should you defer your mortgage payment?
Just because you can defer your mortgage payment should you defer your payment?
Everyone is being impacted by the covid-19 outbreak in a unique way.
If you cannot make ends meet and have a decision to make between meeting your family’s basic needs and paying your mortgage, then absolutely you should.
However there are varying degrees of need and some borrowers might see it as an opportunity to take a “break”.
In general I would recommend that if you can keep your mortgage up to date then you should. This is not a mortgage payment holiday or forgiveness program.
At the very least you should save the interest and make a pre-payment as recommended above.
My chat with MCAP regarding their support for Canadians
For anyone who has tried to call their mortgage lender and been frustrated you are not alone. Lenders are reporting that they received a year’s worth of phone calls from clients within a 30 day period. We managed to flatten the curve for covid-19 but the same can’t be said for customer service calls!
MCAP is one of Canada’s largest residential mortgage lenders. I recently sat down with Corey Massi business development manager to learn more about how MCAP has evolved and adapted through the covid crisis to support their clients.