How the cost of making your mortgage go away for six months could top $12,000

Your personal finance to-do list for this week:

• Understand the cost of deferring mortgage payments;
• Consider a couple of less drastic measures to ease your mortgage costs;
• Avoid online-ordering creep – it’s easy to keep bumping up your online buying while physical distancing.

The Pandemic Personal Finance Update is a weekly feature of practical, actionable ideas and tips to help people manage their finances through the difficult times ahead.

UNDERSTAND THE COST OF MORTGAGE DEFERRALS

The offer from Canada’s banks to people experiencing financial hardship as result of the pandemic to defer their mortgage payments for up to six months has been popular. Close to 600,000 people had either arranged to defer their mortgages or skip a payment as of April 8, the Canadian Bankers Association says.

What hasn’t been discussed much is the cost of this deferral. They work on a case-by-case basis, but it’s now clear the interest not paid during the deferral period is added to the balance owing. This means you’re paying interest on interest. How big a deal is this?

If you take the full six months, the cost is definitely a big deal. Let’s take a look at some examples produced by mortgage broker David Larock using a $400,000 mortgage at a rate of 3 per cent and amortized over 25 years. For a “worst case,” we’ll assume the borrower just bought a house and almost immediately took advantage of the deferral. Here’s what deferring for up to six months will cost over the duration of the mortgage, which would be 24-plus years:

• One month: $2,082 in total interest, $7.08 in extra interest per payment.
• Two months: $4,155 in total interest, $14.13 per payment.
• Three months: $6,217 in total interest, $21.15 per payment.
• Four months: $8,720 in total interest, $28.13 per payment.
• Five months: $10,313 in total interest, $35.08 per payment.
• Six months: $12,346 in total interest, $41.99 per payment.

These estimates assume the borrower doesn’t eventually pay back any of the extra interest from deferring. Making a prepayment on the mortgage would obviously help lower the extra interest costs.

It would be great if banks let people defer mortgage payments with no additional interest cost, but that’s not happening right now. So evaluate the costs this way: Is paying thousands of dollars extra for your mortgage worth the breathing space you get from pausing your biggest monthly expense for several months during an unprecedented economic slowdown? Canada Mortgage and Housing Corp. says the average monthly mortgage payment is $1,326.

CHECK OUT TWO QUICK AND EASY WAYS TO SAVE ON YOUR MORTGAGE

If you make accelerated biweekly payments, you can save a significant amount by switching to monthly payments. On that $400,000 mortgage example used above, going from paying every two weeks to once per month would save about $155 per month. Mr. Larock said a change like this should cost nothing and can be done with a phone call.

One more simple way to hammer down your mortgage payments is to extend your amortization period – the longer the amortization, the lower your payment. You can extend back as far as your original amortization with no hassles (if you have 21 years of payments left in a 25-year amortization, for example, you could extend that 21 years to 25). “Lenders have discretion on this, but in the current environment, they’d do that for just about anybody,” Mr. Larock said.

Moving to monthly payments will slow down the process of paying off your mortgage and cost you more in interest, but you could make a payment against principal later to get back on track. Stretching your amortization will also cost more interest and delay mortgage repayment.

CONTROL YOUR ONLINE SPENDING

It seems logical that physical distancing will save us all a lot of money, but it’s becoming clear that you can buy almost anything you want online. Takeout meals, groceries, luxury food items, booze – I ordered contact lenses online for the first time last month.

It’s tempting to liven things up at home with online orders, but stay within limits. Physical distancing offers a chance to reduce household spending and put more toward savings that may well come in handy before this pandemic ends. Set a target savings amount each week if you can and stick to it.