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Canada’s New Mortgage Deferral Program

May 19, 2020

For many years now we have been providing our clients with solutions to pay down their mortgages in the most efficient manner possible. Recently, during the Covid-19 pandemic, the Government of Canada, along with Canadian banking institutions, announced a mortgage deferral program. This program allows Canadian’s to, in essence, defer their mortgage payments for an initial period of six months. There is some discussion that this may be extended for an additional six months into 2021.

 

What many people need to understand is that when you skip 6 payments, the payment is added to your outstanding balance and interest is charged on that amount. This means that your mortgage balance will increase. Your payments won’t change during the term of your mortgage. Instead, at renewal your mortgage payment amount increases to account for the higher balance. The idea of paying additional interest on your mortgage interest, is not a pretty picture. However, with historically low interest rates, (variable rates are as low as 2.2%), now may be a great time to take a mortgage holiday for 6 months.

 

Mortgages are interesting creatures. Remember, historically, in the early years of your mortgage, you are paying mostly interest. In the middle years it is evenly split and nearing the end, you are repaying principal. Have a look below at today’s reality:

 

Example 1

Example 2

Amount

$ 400,000 $ 400,000

Rate

5.0 % 3.0%

Amortization

25 year amortization 25 year amortization

Payment

$ 2,325.00 $ 1,892.00

Principal

$ 676.00 $ 899.00

Interest

$ 1,649.00 $ 993.00

 

As you can see, in example 1, you are paying a significant portion of interest – 70% whereas in example 2, it is only 52% interest. So, in these difficult times this program is unprecedented and welcome relief to many homeowners. As always, if you are able to make payments, the best return will always be to pay down your mortgage.

 

I am not suggesting that deferring your mortgage payment is a good idea. I am simply saying that in the history of Canada, now may be the best time to give it some consideration.

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