Mortgages

Hello Friends!

There’s been quite a bit of misinformation regarding mortgage deferrals during this pandemic, and I would like to super simplify it to make it easier for everyone to understand. I will also outline how it looks from the borrowers and the lenders perspective.

The best way to think about a deferral is to think of it as an IOU (I OWE YOU).

For example, if I know my mortgage payment of $1,850 is coming up on Tuesday, and I’m unable to pay, I know I will have to pay it in the future (as an IOU).

A key fact to remember is that prior to this pandemic, 80% of the major lenders in Canada, would let you defer one payment per year without any questions asked, at any time for any reason. They are still allowing this during the pandemic.

It’s a simple process of logging online to your mortgage account and clicking one of the below options.

They go by different names at different banks, but they pretty much mean the same thing:

Skip-A-Payment (RBC)

Payment Pause (TD)

Take A Break (BMO)

Miss A Payment (Scotiabank)

I am including a screenshot of my personal mortgage account with RBC for one of my rental properties.

I can click 3 buttons and skip a mortgage payment. ($$$ amounts changed for privacy)

1) BANKS PERSPECTIVE

Banks allow deferrals, because they want to be competitive with other banks. Banks want to keep the homeowners happy and stress free during hard times. The banks will also make more money in the long run.

When you skip (defer) a mortgage payment, you still eventually owe the bank the payment that you skipped.

To clarify, the interest portion of the payments that you skip, gets added on to your remaining principal balance. You will owe this amount eventually, and in most cases it will be AT THE END OF YOUR AMORTIZATION PERIOD. Not at the end of your current term.

Definition – Amortization Period: How many years it would take you to pay off your mortgage completely, if the interest rate, payment amount, and payment frequency stayed the exact same throughout this period.

For example, if you have a remaining principal balance (mortgage) of $400,000 and you skip one monthly payment of $1,850, which was made up of:

a) Interest portion payment of $930

b) Principal portion payment of $920



After the mortgage deferral of one month, your new remaining principal balance (mortgage) will be $400,930. (Only the interest portion will be added to your remaining principal balance)

During this pandemic, if you can verify that you have lost all sources of income, and you don’t have any savings, major Canadian lenders are allowing you to defer up to 6 months of payments. Let’s look at the example again, as if you would defer 6 months of payments instead of 1.

You would skip (defer) 6 monthly payments totalling $11,100. ($1,850 per month)

a) Interest portion payment of: $5,580

b) Principal portion payment of $5,520

Your new remaining principal balance (mortgage), after 6 months of mortgage deferrals would be $405,580. (To reiterate, only the interest portion gets added to your remaining principal balance)

2) BORROWERS PERSPECTIVE

As you’ve read in the example above, it’s completely fine to skip a single payment. You’re really only deferring $930, and it will give you one month to get back on your feet and make your next mortgage payment.

If you skip 6 payments, it’s only an additional $5,580, that you are committing to pay in the future instead of paying right now.

As I mentioned above, you don’t owe $5,580 after 6 months. You will owe this amount eventually, and in most cases it will be AT THE END OF YOUR AMORTIZATION PERIOD. I can not stress this enough.

Amortization periods are usually between 25 to 30 years, and if you have been living in your home for a few years it will be much less. Your REMAINING AMORTIZATION IN YEARS AND MONTHS can be found on your annual mortgage statement.

3) My Personal Advice

If you have currently lost your income and don’t have any sufficient savings to pay your mortgage, log online to your mortgage account and defer your mortgage by 1 month immediately.

You can do this right away in the comfort of your own home, without making any phone calls or going in person to the bank. After a few weeks, if your situation has not improved, you can call your lender directly. Hopefully, by this time, the phones are not as busy, and the lines are not as long. When you call them directly, speak to them about deferring your future mortgage payments.

Another option is to consider deferring your property tax payment. Property tax in Toronto is at 0.61% and on a $500,000 home it works out to about $3,000 a year.

If you are on a 6 month tax plan in Toronto, of March/April/May/July/August/September payments, defer both the $500 payments in April + May.

The City of Toronto and The City of Mississauga, are allowing home owners to defer property tax and utility payments by 60 days in Toronto, and 90 days in Mississauga. The City of Brampton is waiving all property tax and utility penalties for 150 days.

I know that we are experiencing difficult times, and I want everyone to know that all levels of the government are there for you, the lenders are there for you, and I am here for you.

I am also including a sample scenario and frequently used terminology below.

Please feel free to contact me directly if you have any questions or would like any assistance.

Thanks,

Day Ravi Ravindran

(647) 235- 8899

DayRavindran@Gmail.com

https://www.instagram.com/dayravi/

Links:

https://www.toronto.ca/home/covid-19/economic-support-recovery/

https://web.mississauga.ca/city-of-mississauga-news/news/city-of-mississauga-covid-19-response-special-emergency-council-meeting-outcomes/

https://www.brampton.ca/EN/City-Hall/News/Pages/Media-Release.aspx/715

Disclaimer:

I did not take compounded interest rates into consideration. I used round and even dollar amounts for simplicity and clarity.

Everyone’s financial picture is different, and I only provided overall general information.

In most cases, to skip (defer) a payment, the payment you are deferring can not be your first or second mortgage payment. (It can be your third and onwards)

This blog post is for information and education purposes only and not to be taken as financial advice, suggestions, or recommendations of any sort of nature.

These terms are used interchangeably: lender and bank, and the terms: borrower and homeowner

Please don’t sue me.

Sample Scenario and Key Words:

Purchase Price: $500,000 (Price you bought your property for)

Down Payment: $100,000 (Money you had available on hand)

Mortgage: $400,000 (Total amount you borrowed from the lender/bank)

Amortization: 25 Years (How many years it would take you to pay off your mortgage completely, if the interest rate, payment amount, and payment frequency stayed the exact same for the entire amortization period.)

Term: 5 Years Fixed (How many years your current lender (bank) guarantees the interest rate. After your term is up, you’d most likely renew the agreement for another 5 years.)

Interest Rate: 2.79% (How much you are paying to the bank as a yearly “fee” for lending you the money. The bank is not lending you the money for nothing in return, they are charging you 2.79% interest. For comparison, Credit Cards charge you about 20% interest.)

Payment: $1,850 Monthly (The amount you pay to the bank on a monthly basis. This amount is broken down into two parts: The Interest and The Principal.)

These two parts: THE INTEREST PORTION and THE PRINCIPAL PORTION are the most important thing to consider when talking about mortgage deferral. I am using round numbers to simplify things.

For example, on your mortgage of $400,000

The yearly interest at 2.79% is $11,160

However, your yearly payment is $22,200 ($1,850 x 12 months).

The amount you contributed towards your remaining principal balance is: $11,040

(Yearly payment minus yearly interest is how you calculate the payment towards your remaining principal balance (mortgage). Again I am using round numbers for simplicity)

Remaining Principal Balance (Mortgage) is another short term for: amount still owed to the lender/bank.

This means that after the end of the first year (12 months), you’d still have a remaining principal balance (mortgage) of $388,960.

The government of Canada provides a great mortgage calculator, that you can experiment with: https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MortgageCalculator.aspx?lang=eng&lang=eng

Please feel free to contact me directly if you have any questions or would like any assistance.

Thanks,

Day Ravi Ravindran

https://www.instagram.com/dayravi/