Tuesday, April 14, 2020

Mortgage Deferral Cost

COVID-19 has a lot of people hurting, personally and financially. The federal government has pushed a sensible measure onto the big banks: mortgage deferrals. Most people who take a deferral have little choice, but this doesn’t change the fact that these deferrals have a cost. Interest keeps building on a growing mortgage balance during the deferral.

Let’s look at an example. Suppose you have 20 years left on a 3% mortgage whose current balance is $300,000. You’ve just made your monthly payment of $1661, and the bank grants a deferral on your next 6 payments. What effect does this have?

To begin with, your mortgage balance will increase to $304,500 in 6 months. Banks may plan to have borrowers increase future payments to catch up, or they may just extend the amortization period with the same payments. Let’s assume the latter case.

How many more payments will you have to make at the end of your mortgage to make up for the 6 deferred payments? The answer is just under 11. That’s 5 extra payments. Keep in mind, though, that these payments will be smaller in real terms because of inflation over the next 20 years.

An extra 5 payments of interest is no fun, but it’s not the end of the world. The bank isn’t doing you much of a favour, but it’s not severely punishing you either. Many people have much bigger concerns right now than a modest extension of their mortgage’s amortization.


  1. Michael I agree with you completely. I am surprised (well sort of but not really) at media reports that people are outraged that banks are still charging them interest on their deferred payments. I would have thought (hoped?) that people would be thanking their lucky stars the bank is willing to free up some of their cash flow so they're able to avoid bankruptcy.

    1. Returns Reaper: I'm not surprised that many people were upset. Mortgage looked like a hand-out but isn't one.

      Keep in mind, though, than for anyone who remains a good risk, mortgage deferment is a net benefit for the banks. They pestered me for years with skip-a-payment offers in an attempt to get me to borrow more. Mortgage deferment is only a loss for banks for borrowers who are now worse risks, because the banks may end up with larger losses in the eventual bankruptcy.

  2. You are delusional if you think they are gouging you. They have no moral obligation to save you. If you got in a mortgage in a rush and had no money to fund a few months of mortgage in case of no income, than you took the risk. Risks materialize from time to time. The economy was ripe for a downturn anyway, the pandemic could no be expected, but you could expect something would tip the scale, as it has happened every cycle, over and over. You live and die by your choices whether you believe that or not. And the bank has no obligation to rescue you.They offerred deferrals when they have the right to take your home, you complain. Yes they dont want homes to sell and its better for them if you pay, even better if you pay more. Still the deferral is beneficial to you. If you cant see that,you are delusional and this reality check will serve you good.

    1. Anonymous: There are some who deserve your wrath, but many who are in trouble don't. It's hard for a young person to plan for a period where they lose a job and have almost no way to find another for an uncertain period of time.

      On the specific issue of what to think of those who thought the deferral came without extra interest, I think most people who got this wrong are just naive. Just the small minority who are "outraged" by the extra interest deserve the reality check you suggest.