Due to the COVID-19 Pandemic, banks have offered to defer mortgage payments up to six months. While this may prove to be beneficial to individuals who are in financial distress, certain people are taking advantage of this option to save money. However, deferral is not forgiveness, and there is a catch.
It's all temporary
Customers from Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, and National Bank of Canada who have been impacted by the coronavirus can apply to defer their mortgages.
Six months of mortgage deferral might seem like a sweet deal, but it will definitely increase your interest rate and principal balance. Understanding this is extremely crucial in making this decision. If you don’t need it, don’t take it. Canadian banks are very transparent with this and they do a great job of letting people know what they’re getting themselves into.
A quote from TD bank website, “Individuals considering this option should give it careful thought: recall that the program is designed to alleviate temporary hardship due to the impact of COVID-19. Depending on the current position of your finances, it may be better to continue with your mortgage payments.”
How it works
Let’s use Jake as an example. He has a mortgage with an original principal balance of 100,000$ amortized over 25 years at a 3% interest rate and pays a monthly payment of $473.25. If he defers his mortgage for the next six months, the interest of missed payments will be added to the principal balance. Because the balance has increased, the monthly payments will also increase to $489.26
Your financial situation
With any financial decision, you always need to ask yourself “Why do I need this?” Deferring your mortgage will leave you with money on hand which you might spend on unnecessary things. Think of it like this, instead of paying your mortgage, you’re now using that money to buy new tires for your truck. You tell yourself you need those new tires to survive the pandemic. In 6 months when things go back to normal, you don’t want to be overwhelmed by bills.
Is it helpful?
Mortgage deferrals are helpful. Especially to folks that have lost their jobs. This article points out what to expect if you choose to defer your mortgage. The best way to use this tool is to be responsible and to plan on how you’ll get back on your feet when the deferral period has ended. Stay safe everyone.