Is deferral of the mortgage preferable? – It’s your money

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About half a million Canadians have already asked to defer their mortgage payments after lenders announced last month that they would offer financial “relief”.

But is deferring your mortgage really a relief?

Much has been written about mortgage deferral options, but most of them are leaving consumers more confused than ever.

Many of those who request deferrals still have the false impression that the bank actually forgives a few months of payments, which is certainly not the case.

A deferred mortgage always bears interest, and that interest will attract new interest in itself – what is called composition.

So what does a mortgage carry-over really cost? Let’s look at the numbers:

For this example, we will use an unpaid mortgage balance of \$ 500,000 and a fixed interest rate of 3.75% for the remaining 25 years of amortization.

If you continue to pay off the mortgage as is, you will pay the following:

• \$ 2,570 monthly payment
• \$ 771,196 of total payments made in the past 25 years

If you decide to defer mortgage payments for the next six months, you will pay:

• Same monthly payment of \$ 2,570, but would last 1.5 more years
• \$ 819,268 in total payments over the next 26.5 years

You would delay your payment for six months by \$ 2,570 per month, for a total of \$ 15,420 of money you are keeping in your pocket right now – which may be necessary in these very unique times. But the total cost of this deferral is \$ 48,072 in additional payments over the life of your mortgage.

Understand that the total additional costs for you are not \$ 48,072 less the \$ 15,420 “saved”. The figure of \$ 48,072 is the total additional amount of payments you end up making to fully repay your mortgage debt.

To explain all of this, I’m not trying to convince you that a mortgage deferral is not the right decision at the moment, but rather I want to make sure that you understand how much it will cost you.

Is this the best way to free up cash right now or are there other things to consider first?

In order to make this type of decision properly, consider seeking advice from a professional financial planner. I understand, however, that for many people, accessing the services of a professional planner is not something they can easily do.

With that in mind, I look forward to announcing a new pro bono financial counseling program later this week that will allow anyone affected by the COVID-19 pandemic to have access to a free 30-minute phone or video conference with a professional financial planner to ask these types of questions.