Today we're going to be talking about mortgage deferrals during this epidemic and whether or not this is a good idea and if you should do it and how it's going to affect you.
So I'm located in Canada and the big banks here have announced in late March that they're going to allow a mortgage deferral of around three to six months. Now, each bank is different and what they're offering is going to vary per person. So what you should do if you're really looking into this as an option, if your income has significantly declined, is you should go and speak to your bank.
Right now we're seeing a lot of people claiming that mortgage payments are going to be frozen and thus, renters should also have their rent payments frozen. And this information is very, very misleading, and unfortunately it's giving a lot of false hope to lot of people, but mortgage payments are NOT being frozen. (as of April 5, 2020).
So if you are going to be looking at this as an option keep at it and hopefully you get through. So here's what it breaks down to. Let's assume your mortgage is $500,000 so what you're going to have is a blended payment typically of interest payment and principal payments. So your principal is the amount that you're paying down on the amount that you borrowed.
The interest is the amount that is being charged for you to have access to the money for your house. So what you're doing every month is you're paying a blended amount. Normally. Now there are different situations where you might be paying interest only if it's a home equity line of credit.
We're also finding that the banks are typically, in most cases only allowing the mortgage deferrals on principle residence. That means you have to actually be living in your property.
Most of the banks are not allowing these deferrals on income producing property. So rental properties. There are some situations where this is the case, but typically it's not. So it's very important for you, again, to speak with your bank and find out the information on that situation itself. Now, the situation here is that if you are getting mortgage deferral for three to six months, however many months, that is your interest in principal payments that you would have normally had to pay, you no longer have to pay it during that time.
What happens in most cases is that your interest that you would have had to have paid builds up. It gets added into the principle amount that you had originally borrowed. So let's say your mortgage was $500,000 and your interest portion is roughly $1,300, and what that happens is over a three to six months, that amount will build up.
Now you're at $500,000 plus the interest that you deferred. So if that's three or six months of interest, that's what you add onto your amount. Your bank is going to be wanting that to be paid back in a variety of different ways. Most of the situations is that the interest is just going to be added to your principle and you're going to have to pay that off over the rest of the course of the mortgage.
So if you have a 25 year mortgage, you're going to be having an extra payment. In that situation this could be around $30 to $35 per month. Again, depends on your interest and how much your owe and how many months you deferred, so make sure you do that calculation and get the details from your bank.
So over the course of that time, it works out to be a lot more than what you would've had to pay interest wise, because that interest is being added right now and you're paying it off over 25 years. So you have compound interest on the interest that you deferred. Another thing to look out for is your credit score.
Some banks are saying this will not affect your credit score. It's a deferred payment, not a skipped payment. The issue here is that often what happens is that you're speaking to a representative on the phone who knows nothing about the actual processes with credit scores.
What the credit scores are calculated on is typically like Equifax. They will get an automated system report from the banks that these representatives have no control over.
And what happens is that it shows to Equifax, Oh, this payment was deferred. In some cases, it may report automatically to agencies like Equifax that it's almost the same as a skipped payment. So we don't really know 100% right now whether or not your bank specifically will be doing the deferral and reporting it as a skip payment or a deferred payment, and if it will or will not affect your credit score.
So best idea is if you can make your payments, continue making your payments and that way you don't have the risk of of hitting your credit score.
So another situation that we're seeing is that some banks are deferring your payments and that's great. But in some cases the banks are asking you to pay back the entire amount of interest that you deferred at the end of the deferral payment period. So let's say for example, you deferred for three months while on the fourth month. Now the banks wants you to repay month one, month two, month three and month four that you owe of the interest payments that you would have deferred. So in this situation now, you're going to get hit with a big bill of a few thousand dollars typically, and you're going to have to come up with that money.
So it's really important to know that this isn't just a free ride. You do need to actually figure out whether or not this is going to be a good option for you.
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