A mortgage payment deferral is not free money.
Jobs and financial security have been threatened by the effects of the coronavirus pandemic over the last few weeks. As the situation continues to develop and change, more lives will be impacted.
To help clients cope, many banks and private lenders have offered mortgage deferrals to ease the burden of countless layoffs during these difficult times. But do not mistake this as free money.
There are many questions and misunderstandings about what exactly a deferral means and the best way to approach your mortgage loan, especially in the face of layoffs. How many months can you defer mortgage payment? When is the amount due? What about interest?
Before getting into this, it is important for you to review the terms your lender has outlined for your mortgage. You may need to contact your lender or broker to see what options your property qualifies for. Every financial institution and lender has different policies and requirements for payment deferrals.
To keep it simple, a deferral is not a canceled loan payment, it is the postponement of a regular payment which will become due at a specific time.
Some lenders have deferred payments for 120 days, which means at the end of that term the entire amount of unpaid mortgage payments is due.
Other lenders are adding the amount of unmade mortgage payments back to the principal of the loan to be paid off over the course of the loan term. In this case, a deferral can increase the monthly payments over the rest of the mortgage term.
Interest is being accrued on the amount owing.
A common misunderstanding about mortgage deferrals is whether interest is being accrued on the amount unpaid. The short answer is yes.
Contact your lender to make sure you have the details pertaining to your loan about how the additional interest is calculated. It may be on the unpaid amount only at a fixed rate over the term of a 120-day deferral, or it could be by adding the amount to the principal which accrues interest over the course of the loan.
The type of financing you have on your property and your lender will determine how interest is being added to your mortgage deferral.
Mortgage deferrals typically only apply to primary residences. For those who own investment properties, they are more likely to not be eligible for a deferral of payments.
What should you do if your income is impacted by the coronavirus?
As soon as you foresee trouble in making your mortgage payment, contact your lender to advise them of your situation and make arrangements with them directly. They have the most information about your situation.
It is important to make payments as you can so that you do not burden yourself with huge debt.
If your mortgage is $1,100 per month and you do not pay anything for three months, you risk being hit with a $3,300 bill plus interest for the time it went unpaid. Small contributions when feasible over the course of the time you are unable to pay your mortgage will reduce the impact of acquired debt when life regains some normalcy.