Over the last week there have been many announcements from the government, banks and lenders, some speculating about possible changes and other promising helpful programs but not offering specifics. One thing that has particularly caught many people’s attention is the announcement from banks and mortgage lenders that they are willing to work with their clients in arranging mortgage payment deferrals.
Mortgage lenders have always been able to make special arrangements with clients to defer payments in exceptional circumstances (this is nothing new or particular to the COVID-19 situation). However, it is important to understand what ‘mortgage payment deferral’ means, and the long term impact it can have, in deciding whether this is something you should pursue for your particular circumstances.
- The most important thing to understand is that deferring your mortgage payment effectively adds the interest you were supposed to pay onto your mortgage balance, so your mortgage balance will start increasing each month rather than decreasing. Eventually you will have to pay back the interest that was deferred.
- In most cases, the lender will charge interest on the current mortgage balance each month, so when you defer your mortgage payments and are adding interest onto your mortgage, you will begin paying “interest on interest”. In other words, the interest you owe for a mortgage payment gets added to your mortgage balance and then for the following payment cycle, interest is charged on that higher balance (which includes the deferred interest).
- If you defer your mortgage payments, it usually has a negative impact on how the lender views you as a client, and can result in less favourable terms being offered by the lender to you at your mortgage renewal.
- Deferring a mortgage payment can negatively impact your credit rating, making it harder to refinance or qualify for new debt in the future. If you decide to defer your mortgage payments, I would strongly recommend asking your lender to confirm in writing that they will not report late payments to your credit as a result.
- If deferring your mortgage payments causes a blemish on your credit report, it can take many months and be very difficult to fix/repair. This will potentially make it very difficult for you to qualify for a mortgage refinance, vehicle loan, or line of credit in the future (later in 2020 or 2021).
When all is said and done, deferring your mortgage payments is definitely the right decision if you or your spouse have suffered a job loss and you absolutely cannot make your mortgage payments as usual.
On the other hand, if your family has not suffered a job loss or substantial income drop as a result of the novel coronavirus pandemic, you should not defer your mortgage payments at this time. From a financial perspective, paying down your mortgage is always a safe investment, which is great in these uncertain times, and continuing to pay your mortgage as usual will ensure your credit remains strong for future borrowing needs.