There is a lot of information about mortgage deferrals out there but a lot of people are still not clear about how it works. I would like to cover 3 main points about mortgage deferrals:
- Who should apply?
- How do you apply?
- How does it work?
Who should apply?
In one way or another we are all affected by COVID 19. In the situation of high uncertainty where we do not know how long the pandemic will last, having a financial cushion is more important than ever for a lot of people.
If you are in a position where a long lasting pandemic may financially affect your family, tenants or even friends, applying for mortgage deferral program may be a good option.
How do you apply?
If you want to apply, contact your lender to see what are their requirements.
Some lenders apply common sense when it comes to qualifying people and may approve you without making it complicated, others may request proof of a financial hardship.
Again, contact your lender as soon as possible to see what their particular requirements are. Expect weeks of delays before the lender defers your payments, as they receive thousands of applications weekly from their clients.
There was a record number of NSFs registered in Canada as many borrowers expected their payments to be deferred on April 1st while some lenders did not process their request on time.
How does it work?
The best way to understand mortgage deferrals is to know how much it will cost you at the end of the day.
Here is a quick break down based on a $400,000 balance at 3.00% amortized over 25 years with monthly payments of $1,896.85 ($400,000 is the average residential mortgage amount in Canada).
So far I came across 2 options that many lenders offer.
1. Make interest only payments for up to 6 months.
This option is pretty straight forward. By making interest only payments you will be paying $1,000.00 per month instead of $1,896.85. After 6 months, your payments will go up slightly to $1,922.88 since $400,000 will now be amortized over a shorter period (24 years and 6 months).
2. Pause payments for up to 6 months.
In case you want to fully pause your payments your accrued interest will be added to your principle balance.
For example, in our case with the $400,000 mortgage, your new balance after pausing your payments for 6 months will be $406,037.63
After 3 months your lender may either a) amortize new balance over remaining period or b) increase your payments by 10%-20% until you catch up.
In case “a)“:
- your payments will go up by $55 to $1,951.90
If you want to know how much interest it will cost you over the full amortization period, RBC has a great calculator for calculating interest for skipped payments: see here.
in case “b)” :
- your payments will go up to $2,086 (increased by 10%) and it will take you 60 monthly payments to catch up with your balance before your payments will go back to normal
Consider Refinancing Your Mortgage
If you have equity in your home, refinancing is another great tool that can significantly improve your cashflow. Three most common ways to improve your cashflow by refinancing are:
- Paying off high interest debt
- Stretching amortization period
- Securing a lower interest rate
Here are 2 examples of refinances that we did in March:
Client is saving over $20,000 per year after refinancing which is almost 20% of his disposable yearly income!
Client is saving almost $30,000 per year.
In my opinion, mortgage deferrals is a great option since having a financial cushion in the next few months can be really important. On average, you will have to pay an extra $10-$15 per month per every $100,000 of your mortgage after the deferral period.
Furthermore, if you have other debts, refinancing is a great solution that you should explore!