During these unprecedented times, it might be tempting to take advantage of the mortgage deferment options available, even if it’s just for a month or two, especially if your income has been noticeably reduced as a result of COVID-19. However, there are lasting impacts to doing so.
If you’re thinking of hitting the “pause” button on your mortgage, be mindful that a deferral is not mortgage forgiveness; the payment is being delayed and the interest accrued during that period of time is added to the balance owing; directly impacting the total interest you’ll pay over the long term. The greater the mortgage balance and deferment length of time, the greater the impact.
“Although there are some instances when deferring one, or even up to six months of, mortgage payments makes sense; homeowners should first consider alternate ways to make their mortgage payments more manageable,” advises Courtney Kaesbauer, Senior Financial Advisor at Envision Financial, a division of First West Credit Union.
Temporarily reduce your investment contributions
The notion of paying yourself first by contributing a percentage of your income to savings has—and always will be—a smart investment strategy. Though, if your income has taken a hit, reducing your contributions temporarily to increase your cash flow might be a great solution.
“Becoming unemployed or having to close your business due to COVID-19, not only reduces your income, but also likely reduces the amount of tax you’d be looking to defer in 2020,” explains Kaesbauer. “Easing up on how much you contribute temporarily while your income is lower, just might provide enough relief to keep your mortgage repayment plan on track.”
Reallocate your household expenses
As you settle into your new “normal”, obtaining an accurate picture of your household budget including your new monthly cash flow and expenses might help you find ways to reallocate and keep your mortgage payments on track.
“With many families self-isolating, some expenses such as weekend entertainment, childcare and extracurricular activities have been drastically cut back or removed altogether for the time being,” says Kaesbauer. “Once you’ve determined what’s actually coming in and going out in your new situation, you’ll have a clearer financial picture of where you’ll be each month with your payments.”
Review the terms of your mortgage
At a time when interest rates are at a historical low, it might be worthwhile to review the terms of your mortgage with your advisor. They can help you determine if refinancing your home is to your benefit.
“Depending on your situation, it might make sense to break the terms of your mortgage to take advantage of a lower rate and subsequent reduced monthly payments”, says Kaesbauer. “With rates as low as they are, the savings could very well outweigh the possible penalties associated with your mortgage.”
It’s important to keep in mind that everyone’s situation is unique. As such, it’s always recommended that you work closely with your financial advisor to review your options and find the solutions best suited for your financial needs and goals.
Envision Financial is a premier provider of banking, investment and insurance services for residents and businesses throughout the Fraser Valley, Lower Mainland and Kitimat regions. As a division of First West Credit Union, B.C.’s third-largest credit union with 50 branches throughout the province, Envision Financial brings innovative products, an extensive branch network and local decision making to the banking experience. For more information on Envision Financial, visit www.envisionfinancial.ca.