It’s been a wild and weird past few weeks in unprecedented financial times.
Shutdowns, physical distancing, lay offs, income interruptions, fear, uncertainty, all of it ….AAACK!
We all need a little reassurance. Whether it’s emotional, financial or otherwise.
Time to breathe…..focus…and look at things through the lens of what’s in front of us, not the million and one “what if’s”.
A question homeowners want answered is,
“Should I defer my mortgage payment?”
If your income has been cut off, or is in danger of not covering your monthly expenses, my advice is:
Steady cash flow in your home can be the difference between feeling unsettled, anxious and uncertain to calming and relieved. It can also prevent further financial problems down the road.
In these unprecedented times, the entire financial industry has come together to find solutions and provide relief for people fearing losing their home due to income interruption.
There’s never been anything like it.
It’s the Cheapest Money in the Borrowing World
Deferring your mortgage payment for 1-6 months can provide you the financial relief you need short term, in the most cost-effective way.
Your mortgage interest is the cheapest loan you’re going to find. Deferring your payments and accruing interest at 3%, or thereabouts, is a better option than credit cards, lines of credit, RRSP withdrawals, and don’t even think about a pay day loan place. (No seriously, please don’t ever go to a pay day loan place)
The Myth of Interest Upon Interest
There is so much info flying around so fast, it’s hard to understand and prioritize what affects YOU.
The most common theory out there is that if you defer your payments, you’ll be paying interest upon interest, because the interest clock keeps ticking during your deferment. While this is true that your interest will continue to accrue, the math isn’t quite as catastrophic as you might have been led to believe.
One of our industry leaders Dustan Woodhouse points out “it is complex because the true ‘cost’ of the payment deferral varies depending upon mortgage amount, interest rate, remaining term, remaining amortization (amortization is different than term), and of course the lender’s policy of repayment timing”.
He also did the math and an average mortgage it works out to approx. 175$ month per $100,000 of mortgage.
In a previous video I did with YourTV Northumberland I mentioned the interest upon interest …and thought I should clarify my comments.
Are you paying interest upon interest for the next 25 years? No. Interest will be added to your mortgage during the deferral, but you are not paying interest upon interest for the next 25 years. Why? Because you can pay back the deferred funds through standard prepayment privileges at just about anytime, (contact your lender for details – this is a link to 36 major lenders as well as tons of COVID-19 financial info – click here ). Besides that, if it free up $1500-$2000 in cash flow monthly ( times 4-6 months = up to $12,000) during a time of extreme stress and crisis, then I say easy trade off.
Long Story Short
If deferring your mortgage payment frees up space in your head mentally, emotionally and financially, it’s a good idea to take advantage of the deferral.
If the cost of deferring a few payments helps you prevent larger losses down the road or higher interest payments, it’s a good idea to take advantage of the deferral.
If deferring the payments helps you keep from losing a property and driving you further into debt, it’s a good idea to take advantage of the deferral.
Think of Your Lender
If you’re in a position where you’re not in income jeopardy, or not yet, I would ask that you think of your lender. They are overwhelmed with people asking questions, asking about deferrals and calls and emails are being prioritized. One lender told me they had 1000 voicemails before 10am on ONE day this week. They only had a 1000 because that’s what their voicemail maxes out. So, if you’re not in immediate need, hold off on calling or emailing. Free up that time for lenders to deal with people in emergency situations.
And be kind … it’s easy to swing to ME over WE mentality when times challenge us (Toilet paper hysteria anyone?).
But we’re all riding this tsunami together.
Stay safe, stay home, and be well.
Yours in success.