Everything You Need to Know about Mortgage Deferrals

May 13, 2020

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The COVID-19 pandemic has created financial stress among many Canadians. If you’re feeling this way, you’re not alone. To help ease this stress, Libro is offering mortgage deferrals for up to 6 months on a case-by-case basis, as are most other financial institutions across the country. What does it mean to defer your mortgage payment? What are the short- and long-term impacts it may have on your finances? Keep reading to learn everything you need to know about deferring your mortgage.

Should You Defer Your Mortgage?

It’s important to clarify that deferring your mortgage isn’t a vacation from your mortgage. You are still responsible for this debt.

So what exactly happens to these payments? When payments are skipped, you are not paying down your mortgage – the principal or the interest. Interest that accumulates during the skipped period is added to the total amount owing when your mortgage payments resume.

You may have heard of other financial institutions charging ‘interest on interest’ for those who choose to defer their mortgage. Libro does not charge ‘interest on interest’ for these missed payments, but the interest that does accumulate during the period still needs to be paid. Therefore, when payments start back up again the first few payments go towards paying back that interest first, before getting split between principal and interest (which is how it was before the deferral period started).

Let’s look at an example:

Jack has a $200,000 mortgage with 22 years remaining.

His mortgage interest rate is 3% and his monthly payments, prior to deferring, were $1,036.

He lost his job due to the COVID-19 pandemic and, at this point, it’s not clear when he will return to work. He knows he needs financial support but isn’t sure whether to defer for one, three, or six months.

Deferring for One Month

Jack defers one month’s payment, which gives him $1,036 to help pay his bills and other obligations for the month. When Jack’s mortgage is up for renewal in five years, his monthly payment will increase by about $0.90. The total amount he pays for his mortgage over the remaining 22 years increases by around $967.

Deferring for Three Months

Jack defers mortgage payments for three months, which allows him an extra $3,108 in cash flow during the time he’s out of work. When Jack’s mortgage is up for renewal at the end of his five-year term, his monthly payment will increase by about $2.60. The total amount he pays for his mortgage over the remaining 22 years increases by around $2,900. 

Deferring for Six Months

Jack defers mortgage payments for six months, which relieves payment pressures while he’s out of work and gives him an extra $6,216 in cash flow for the period. When Jack’s mortgage is up for renewal at the end of his five-year term, his monthly payment will increase by about $5.20. The total amount he pays for his mortgage over the remaining 22 years increases by around $5,800.

Note: When deferring your mortgage, there is no impact on your payments until your mortgage term comes to an end and you renew your mortgage.

As you can see, deferring your mortgage adds to the overall cost of your mortgage and can impact your payments for the remaining life of your mortgage. The longer the deferral period, the greater the impact. This is an important consideration when making the decision to defer. While this is a stressful time for many, we highly encourage you to continue making mortgage payments if you are still able to do so.

What if you’re in a more financially-comfortable state in the months after your deferral? At Libro, you have the option to ‘catch up’ your deferred mortgage payments so you aren’t increasing your payments in the long term. This option might not be available at all financial institutions.

If you are struggling to make your payments, please contact your Coach to discuss the options available to you as there may be a solution that has less financial impact and is better suited to your situation. Deferring your mortgage may make the most sense for you now; however, it’s important to take your future finances into consideration, and your Coach is here to talk you through it. 

By Michelle Lines

Michelle Lines is a Credit Specialist at Libro Credit Union in London, Ontario.