The True Costs of Mortgage Deferrals to Your Business
It’s no secret that 2020 has been a pretty tough year for individuals and businesses alike. The emotional toll of living and working through a pandemic has been immense, while the financial side effects have been equally dire for many business owners.
Many restauranteurs, in particular, have seen a dramatic decrease in customers due to the pandemic. This, of course, has led to some pretty serious financial problems. In response, the Canadian “Big Six” Banks have implemented mortgage deferral options for businesses whose incomes have been reduced by the virus.
Before you and your business jump at the chance to defer a few mortgage payments, it’s crucial that you understand some of the risks that could be involved.
Here are there things you need to know about the new deferral options before you make your decision.
Why Mortgage Deferrals Come at a Cost
While you may imagine that a mortgage deferral program means simply waiting to make your repayments, in a lot of cases, it ends up being hugely costly.
Your Future Payments Will Be Larger
Deferral means delaying payments, and no matter how long you defer your payments, you’ll still have to pay back the total sum eventually, including capital and additional interest charges. However, the longer you put off making repayments, the shorter your repayment time frame will be, and the higher your interest charges will be. Ultimately, this will mean that the dollar amount of your monthly payments will increase, which could cause further financial stress to you in the future.
You’ll Still Need to Pay Interest
In almost every deferral play, you will be required to pay additional interest on your loan. Essentially, you will be paying more in total interest charges than you otherwise would have paid, as the overall amount due will increase.
You’ll End Up Paying More Over The Term of the Mortgage
Overall, this means that you’ll end up paying more money in total during the existing loan term. While it may seem like you are paying less now, deferring your payments means two things:
(1) at some point you need to catch up to the original schedule of payments, or you will need to make a large lump sum payment to keep your original mortgage repayment schedule
(2) You’re going to be paying interest on the original interest payments that you have delayed paying off in the short term for the balance of the mortgage term.
With additional interest charges on top of the existing ones, and principal payments due, your mortgage just became far more expensive than it was originally. .
How Much Will You End Up Paying?
If you want to find out exactly how much money you will have to pay in addition to your original mortgage by signing up for a mortgage deferral, you’ll have to do some calculations based on your loan amount, your loan term time remaining, your interest rate for the existing mortgage, and the newly borrowed funds, and your current repayment amount.
The longer you defer your mortgage plan for, the more your payments will increase when you resume payments, and the higher your total interest payments will be. If you defer your loan for six months, for instance, you may find yourself with a repayment amount that is hundreds of dollars more than your current amount. Plus, you may end up paying thousands of dollars extra on the loan over time.
For example, if you have a mortgage balance of $580,000 on your home on a 25 year amortization under a five year term at 2.25%, making monthly payments of $4157.16 and you delayed the mortgage by six months when you have 4 years left on the term, your payments will increase to $4,413.91 for the balance of the term. Your mortgage balance will also be higher at the end of the 4 years, by more than $27,000. You will also pay an additional $2,159.29 in interest during those four years, and $3,107.57 over the remaining amortization (21 years) of the mortgage before you finish paying for your home.
The above example is for illustrative purposes only and we advise readers to speak to their lender about the options available to them, and be sure to get the full picture of what a deferral program would mean in the long run before signing up.
Our team works with excellent Mortgage Brokers and we are happy to connect you with them upon request. Contact us to find out more.