Mortgage deferral? Remember, it’s not forgiveness

Key issues to consider before making a decision

With all the hype around the ability to defer various debt payments amid COVID-19, you may be considering deferring regular mortgage payments. While any such deferral is subject to eligibility and availability, there are a number of important factors you should consider.

A mortgage payment deferral means you may not be required to make regular payments on your mortgage (principal, interest, and potentially property taxes) for up to six months based on the specific relief being offered by your lender. The most important thing to remember is that this is a deferral and not a forgiveness of any of your debt.

Calculate the interest

During the time that you defer your mortgage payments, interest will continue to accrue at your stated mortgage rate and will be added to your mortgage account. This means your regular mortgage payments will be higher after the deferral period ends for the balance of the applicable term. You should calculate the cost of interest in deferring payments as this is worth knowing; it is not free money. While you will pay more in interest over the life of your mortgage, a deferral may assist with managing your short-term cash flow requirements.

When deferral doesn’t make sense

For some individuals, just knowing that mortgage deferral is an option will give them the necessary peace of mind, but it is best to be informed. If you have regular cash flow and are able to afford your mortgage payments with little to no financial impact or difficulty, it is important to consider that any deferral, no matter how small, is more than likely to have a negative effect on your long-term financial goals.

Managing cash flow

That being said, mortgage deferral can be a valuable option for those who need some extra help. Deferring your mortgage and instead diverting these funds to a savings account may be an effective means to build a financial emergency fund.

Deferring mortgage payments may also be a good idea if the only alternative to manage restricted and depleting cash flows during this difficult time are high-interest personal loans and/or credit cards with double-digit interest rates. In managing your personal cash flow, determine what bills may be able to be deferred and which may not. Not all bill providers are allowing deferrals.

It is also important to consider your current employment situation, both currently and prospectively. Corporations are constantly changing how they are responding to this dynamic situation with many firms instigating initiatives such as unpaid leave (i.e., furlough days), wage cutbacks and unfortunately, layoffs.

Create a written record

Some financial institutions are not properly set up to report the deferral of mortgage and other debt payments; therefore, it is recommended that before you decide to defer any debt payments that you ensure a formal agreement exists between you and your lender indicating that they will not charge any penalties or hold you in default as a result of the deferral.

Some lenders are offering alternatives to payment deferrals such as extended amortization periods and switching between mortgage products offering different interest rates and therefore different payments. It is recommended that you correspond with your financial institution by email or other written means where possible, as opposed to by phone as you will have a written confirmation of your discussions. In addition, it may be easier to complete this request online, giving your financial institution time to respond to the sheer volume of requests that are being received.

What about your credit rating?

Ensuring that you have written approval for the deferral from your lender may also prevent any negative impact to your credit rating. The major banks have noted that mortgage deferrals should not have any materially negative effects to an individual’s credit rating at this time. It is recommended that you regularly review your credit rating to ensure that no negative impact is reflected in error.

Every individual situation is unique. While deferring mortgage payments may be appealing and an emotionally based decision, it is important to consider your unique and overall financial position, as well as all the implications of this decision.

If you are thinking about deferring your mortgage or other debt payments, please contact us to discuss your personal financial situation further.