The COVID-19 pandemic is causing financial hardship to large number of people. Many banks are offering to help by allowing people to defer mortgage payments – by up to six months in some cases.
Are there any downsides to deferring mortgage payments? How do you go about skipping mortgage payments with your bank? Should you defer your mortgage?
We’ll be giving you all the key pieces of information to help you answer these questions.
Are there any downsides to deferring mortgage payments?
As with all things in life nothing comes free. When you defer a mortgage payment, the bank will add the interest that was supposed to be paid to your principal.
This means that over the lifetime of your mortgage you are paying the bank more money than you would have had you not skipped a mortgage payment.
For example let’s assume:
- You have $200,000 owing on your mortgage
- Your monthly payment is $1000.
- With this $1000 payment, $600 is paying down your principal and $400 is paying off the interest.
Now let’s say you skip a payment. Your new mortgage principal amount will be $200,400 (original mortgage owing plus the interest payment you skipped).
However, with interest rates near historic lows in 2020 you’re not causing yourself to pay too much more by skipping a mortgage payment.
Another point to consider is that if you’re on the “skip your mortgage payment” program you can pay back the amount you skipped at any time to reduce your overall interest cost.
How do you go about skipping mortgage payments with your bank?
Most large banks such as Chase, Bank of America, and TD all have online options for you to skip your mortgage payments. You can simply login to online banking and submit the request.
The majority of the online requests will not allow you to skip payments for more than a month. For longer term mortgage payment deferrals you will likely have to either go into the branch or speak with someone on the phone.
Before you submit any sort of request please make sure you have concrete reasons for the request. For example, if you have a short term rental property that you had to shut down due to COVID-19 then that is a good reason for your mortgage deferral request to be approved.
If you still have your full-time job, and just want to skip your mortgage to play it safe then the bank may not be approving your request.
One thing to note is that the banks are unlikely to allow a mortgage deferral if skipping the payments mean that your principal increases to higher than the original full mortgage amount. This is usually only an issue if it’s your first year with your mortgage.
Should you defer your mortgage?
In times of great uncertainty such as the COVID-19 pandemic we would recommend you defer your mortgage if possible.
It is much easier to defer upfront so you can keep your cash, when compared with running to the bank in a panic when you suddenly lose your income.
Also keep in mind that you can pay back the deferred amount at any time. If your income doesn’t end up getting affected by whatever life event you’re worried about, then just do a lump sum payment towards your mortgage to get it back on track.
If you do defer your mortgage, then we recommend signing up for a free account with a credit score site like Credit Karma in the USA or Borrowell in Canada. You ‘ll want to keep a close eye on your credit score to make sure the banks are not reporting the deferred mortgage payments as missed payments.