Covid 19 – Should You Delay Your Mortgage Payment?

 

Why this message to you today?  Have you suffered from a loss of income?  Is it helpful to you to delay a payment on your mortgage?  Be careful of the implications of this strategy.

 

More Specifically:  (source: I have drawn this information from Federal Government website).

  • The Federal Government has announced a plan for consumers to work with their lending institution IF making a regular mortgage payment is a challenge for you today.  The Federal Government is playing a role in helping to support financial institutions so that they do not have to put a loan into default if payments are not paid.
  • Canada’s mortgage insurers are committed to providing homeowners with solutions to mitigate temporary financial hardship related to COVID-19. This includes permitting lenders to defer up to six monthly mortgage payments (interest and principal) for impacted borrowers. Deferred payments are added to the outstanding principal balance and subsequently repaid throughout the life of the mortgage.
  • The Canadian Bankers Association website specifically mentions that this is a deferral of payments and interest which will in turn be added to your future mortgage amount and your future payments.  https://cba.ca/mortgage-deferral-to-help-canadians-experiencing-financial-hardship-due-to-covid-19?l=en-us

 

Now let’s look at how this might impact you:

  • Let’s assume you have a $250,000 mortgage, a monthly payment of $1725 and a current amortization period of 15 years.  If you did not make payments of $1725 for 6 months, then your new mortgage value in month 7 may be as much as $265,000.  At a 3% mortgage rate, keeping the same 15 year amortization period, your new monthly payment may be only $1825 per month.  Alternatively, you could extend out your amortization period for another year, increasing it from 15 to 16 years.  If you were to do this, then your mortgage payment may drop back down to approximately $1737 per month.
  • Here’s the good news:  if you choose to delay making payments for up to 6 months, with the current low interest rates, the financial impact may not be that great.
  • What’s the key?  The key is your amortization period.
  • Is your current amortization period greater than 22 years?  If so, you may have less flexibility to extend your mortgage amortization period.  You can likely extend it back out to 25 years, but this also means that you will be paying more interest over a longer period of time.
  • What’s the ideal amortization period?  The ideal period is always less than 20 years.  It is really important to get your amortization period down below 20 years so that a) you pay less long term interest costs AND b) you have the flexibility to extend the amortization period if you run into some financial challenges from time to time.

 

The bottom line:  Deferring payments like this is likely something that can be manageable in most situations.  However, it may be better to work with your bank today to change your amortization period to reduce your current monthly payment OR to make a portion of your payment each month and only defer a smaller amount (if possible).  It is also important to consider these various options now rather than later.  It is important to plan ahead and to know your options since we really don’t know what may happen in the weeks and months ahead.

Road To Mastery Principle:  It is always best to work from a position of strength by being proactive in considering all of your options.  You always have fewer options and less flexibility when things are left to the last minute and are being dealt with in times of crisis.

 

If you wish to consider this option, please let us know and we can assist you in determining the best approach for you today.

 

For more information you can go to the Government of Canada Economic Response Plan: https://www.canada.ca/en/department-finance/economic-response-plan.html

 

"IMPORTANT DISCLOSURES: The comments above are for information purposes only and do not constitute specific financial advice regarding your specific situation. Please consult a professional financial advisor who is familiar with your personal situation before acting on any information presented above. Every effort has been made to ensure this information is presented responsibly and accurately. However, important details may have been missed or these details may have changed since the publication of this note. All facts and opinions noted above must be reviewed to ensure their accuracy is still relevant based on today’s specific situation, whatever that may be. Nelson Financial Planning Corp is not responsible for any action you take regarding this information."