One of our preferred Mortgage Brokers – Eitan Pinsky with Pinsky Mortgages – has offered some helpful information about deferring your mortgage during COVID-19 and how that affects you long term. The biggest takeaway here is that if your finances have been negatively affected during this time, then it’s worthwhile to defer your mortgage. However, you may benefit from re-financing your mortgage so chat with your mortgage broker (or Eitan if you want an Expert Opinion!) and chat with your accountant and financial advisor about your other options and the best path forward.
Mortgage Deferral Information from Eitan Pinsky
Head to Eitan’s website for his full blog post about Mortgage Deferrals during Covid-19!
A mortgage deferral is an arrangement between you and your lender that you will suspend your mortgage payments for an agreed-on, temporary length of time. During this pandemic, the maximum length of time is 6 months. Once a mortgage deferral ends, your mortgage payments go back to normal.
The mortgage deferral is a pause on mortgage payments themselves, not a forgiveness of the overall mortgage obligation, which means that interest will continue to accumulate and be added to your debt. In other words, when you defer your mortgage payment, you are not paying principal (paying down your mortgage balance) nor interest (how much you owe on your mortgage balance). This interest is then added to your mortgage balance.
How to Defer Mortgage Payments
All you have to do is contact your lender (call, email, or use their website) and ask for a deferral. I recommend checking your lender’s website for specific information to provide, and then contacting them online. Expect call volumes to be high so you will likely have to try a few times before getting through with the expectation that you’ll be on hold for awhile. Eitan has a handy list detailing Mortgage Lender Contact Information.
Costs of Deferring your Mortgage
Eitan provided me with a helpful EXAMPLE calculation to show you how much a mortgage deferral will cost you. There are two ways to calculate the costs, so I’ve broken them both down:
- Mortgage: $500,000
- Start Date April 1, 2018
- Original Amortization: 25 years
- 5 Yr Term Fixed at 2.99%
- Monthly Payments of $2,364
CALCULATION BASED ON INTEREST RATE
Let’s defer this mortgage for one month on April 1, 2020. Assume you’ve paid your mortgage for 2 years. Using a mortgage calculator we will be left with a balance of $472,204.
An easy way to know how much interest you’re charged per month is your rate of 2.99% multiplied by $472,204 divided by 12 (this is a rough calculation and does not include compound interest). This equals $1,176 in interest (actual interest using compounding is $4 different – close enough).
OK, so we didn’t pay $1,176 in interest… this interest is added to our outstanding mortgage balance.
Now, to understand how much this one mortgage payment deferral will cost you, we multiply it by 2.99% to get ($1,176 x .0299) $35.04, or $2.93 per month. This is the monthly interest you’re charged on the foregone monthly interest you did not pay. That’s not the full story though. Since we’re NOT paying that $1,176 in interest, it gets added to our mortgage. So, you’re effectively being charged twice… once in the month you should have paid it, then again in the next month where you DO pay it. Therefore, your total interest costs are multiplied by 2.
So, 2 x $2.93/month x 36 months = $211. Therefore, deferring one mortgage payment will cost you about $211 over the course of the next 3 years in this example. At the end of your term, your mortgage will be higher by one mortgage payment ($2,364) and the extra interest (~$211).
CALCULATION BASED ON PAYMENTS
Here’s another breakdown of the same example. Looking again at a mortgage of $500,000 and an interest rate of 2.99% with a 5 year term over a 25 year amortization:
Below is what your normal 5 year term (60 total payments) would look like…
– Term 5 Year Total Payments: $141,820 (= 60 payments of $2,364)
– Principal Paid: $72,709 (51.3% of payments in this example)
– Interest Paid: $69,111 (48.7% of payments in this example)
– Term End Balance: $427,291
Below is what your 5 year term would look like if you deferred 1 payment (so 59 total payments)…
– Term 5 Year Total Payments: $139,456 (= 59 monthly payments of $2,364)
– Principal Paid: $71,301
– Interest Paid: $68,155
– Term End Balance: $429,871 (= $2,580 more due to the one deferred payment of $2,364 plus an extra $216 in interest costs)
This just about matches the rough calculations we did in the original example above.
The extra balance you’ll find at the end of the term will need to be paid off at the end of your term, or potential re-mortgaged when you re-finance your mortgage at the end of your term. The more months you defer, the higher your balance will be in the future.
For more information about whether or not you should defer your mortgage, view Eitan’s post about The Cost of Mortgage Deferrals.
For more information, or to talk to Eitan about some other options, including re-financing your current mortgage, you can contact him at: