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If you’re one of the many Canadians looking for relief during these times, the ability to defer a mortgage payment is one option offered by most lenders. It may be appealing for those who need to free up cash flow in the short-term, as it could defer a significant financial obligation. But how do you decide if it is right for you?
RBC Financial Advisors Kim Cormier and Michael Staysko share their perspectives and answer the key questions clients are asking about this relief option.
Q: When Might It Be Advisable for Someone to Defer a Mortgage Payment?
“Deferring mortgage payments can provide you with much needed peace of mind during uncertain times, and allow you to focus on what matters most,” says Cormier.
“Taking advantage of this immediate, short-term financial relief option could improve your monthly cash flow, if you are experiencing a reduction of income to preserve your current cash on hand to cover your most urgent life expenses,” adds Staysko.
Q: Do I Need to Work with My Bank to Defer My Mortgage Payment, or Can I Just Simply Skip It?
If you feel that deferring a payment may offer the relief you need, it is important to work with your mortgage lender or financial advisor to set up the deferral. That’s because simply avoiding a payment can come with negative consequences. “If you just don’t make your required payment — without going through the formal deferral process — you could cause your mortgage to become delinquent, see a negative impact to your credit rating, and risk potential foreclosures,” warns Cormier.
Speak with an advisor sooner rather than later to explore your options. “Understanding your options during the early stages of income disruption will allow you to make informed financial decisions,” explains Staysko.
Q: What Are the Cons of Deferring a Mortgage Payment?
Cormier and Staysko explain that the short-term relief offered by a deferred payment may lead to financial strain later on, as any unpaid interest that accrues during the skipped period, will be added to the outstanding principal on your mortgage. This means that you will owe more on your mortgage in the long run, than if you never deferred a payment.
Says Cormier: “If you decide to defer payments, you are not paying any principal or interest for those months. Ultimately, this move will result in higher overall costs in the long run.”
“Reduced monthly payments can also lead to a longer repayment period,” adds Staysko, “which results in more interest over time.”
Q: What Other Options Do I Have If I Don’t Want to Defer a Mortgage Payment?
Cormier and Staysko explain that there are many other ways to free up funds right now if you don’t feel deferring a mortgage payment is right for you. The following are options you can discuss with your financial advisor:
Refinancing your Mortgage. If you have equity built up in your property, you may be able to access it to pay out other debts or cover your day-to-day expenses through refinancing or credit restructuring.
Increasing your mortgage amortization. Extending your amortization may help you lower your existing monthly payments, since you will be spreading out your payments over a longer period of time.
Adjusting your monthly budget. You may be surprised to learn that being forced to stay home has decreased your spending on those small, day-to-day items that add up. An advisor can help you look at your budget and look for options to save on daily expenses.
Pursuing other deferral options. Some municipalities offer the option to defer property tax payments, and several service providers are allowing utility payment deferrals. You may also be able to defer payments on loans or credit cards. These options may provide alternatives to deferring mortgage payments.
When it May Make Sense to Defer a Mortgage Payment
Still not sure if deferring a payment may be right for you? Cormier and Staysko provide two client mortgage deferral examples:
Case Study 1: Mary*
Mary is a 55 year-old divorcee. She has a $350,000 mortgage with a 20-year amortization and four years remaining in her term. She has been temporarily laid off but expects to be back at work within the next two months. Cash flow is a big concern for her right now.
Her mortgage payments are $1,884.66/ month.
If she defers two months, she will increase her cash flow by $3,769.32. However, this decision will result in accumulated deferred interest of $1,567.44.
In this situation, RBC Advisors, Cormier and Staysko would likely recommend that Mary not defer her mortgage payments, given that her income disruption is only short-term, and incremental cost to Mary via the accumulated deferred interest is high considering her layoff is only short term. “Instead, we would help Mary explore a number of alternative options to make sure she has access to cash flow during the period she is not working. In addition to working with Mary to focus on her long-term financial goals,” says Cormier.
Case Study 2: Mark*
Mark is a 40-year old married father with two children. He lost his job when his company went bankrupt as a result of COVID-19, so he will need to find new employment. He has some money in his savings account — but it’s not going to last forever. Deferring a few mortgage payments may allow him and his family to cover bills, buy food and stretch their limited dollars until he finds permanent employment.
He has a $700,000 mortgage with a 25-year amortization and 49 months remaining in his term. His mortgage payments are $3,202.39/month.
If he defers two months’ worth of payments, he will increase his cash flow by $6,406.78. However, the move will result in accumulated deferred interest of $3,134.87, costing him additional $363.01 in interest over the remaining term.
“In this situation, we would likely recommend that Mark take advantage of deferring mortgage payments given that his income has been disrupted and his current focus will be covering his essential day-to-day living expenses. While he makes use of his savings to take care of his family right now, we would guide him to government relief programs that can provide additional support,” says Staysko.
Deferring mortgage payments could provide immediate financial relief for those who are concerned about covering their essential bills and day-to-day expenses. But it’s worth carefully considering the potential future financial impacts.
By speaking with a financial advisor about your individual situation, you can determine if this is the right move for you. RBC advisors are available to help you navigate your options and find the best path forward for you and your family. Have questions? Book an RBC Check In with an advisor today.
* Case studies are fictitious characters created for purpose of illustrating mortgage deferrals
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.