As it turns out, in 1612 there was a mortgage deed for 60 Pounds according to information from the British Library. If good ole William were my client today, holding the typical mortgage of today, my conversation with him would involve ensuring he understands his options.
I have had a few conversations with clients and close circle about this and I have noticed a recurring trend in these discussions. They include a concern that the deferral will have a negative impact on their credit report, or that it will cost more in interest, and take longer to pay the mortgage off. With these concerns they have not researched the details any further.
Credit History Impact
A mortgage deferral offered by your bank will not result in a negative impact to one's credit history. If you speak to your bank and formally request the deferral, which they approve then your credit history will be fine. On the other hand, if you just stop paying your mortgage for six months without a mutual agreement with your lender, then this is not a deferral but you defaulting on the agreement. You and your lender must be on the same page, and if they have agreed to you skipping six payments. When done properly your lender will not report to the credit bureau that you have been irresponsible and missed your payments.
Interest Costs and Time to Pay Off
This brings us to the next concern which is how much it will cost in dollars or additional time to pay the mortgage off. The answer to this question depends on what you do with the money you didn't pay on your mortgage for six months. For an easy example if your mortgage payment was $1000 per month, then you would have an extra $6000 in hand which you did not pay to your mortgage. If after six months you had no financial issues and don't foresee any on the horizon, at that point you can do a lump sum payment (option allowed on most mortgages) of the entire $6000 to get caught up. If you are not able to do this then it will take you more time to pay it off and some additional interest. I suggest confirming with your lender that they will allow you to make a lump sum payment. So which path should one take, defer now and see what happens in six months, or do a wait and see first before requesting the deferral.
Avoid One Way Streets when Lost
The wait and see will put one at the mercy of two things out of our control, how long the window to apply for deferral is open, and the state of the economy and its impact on one's income. If you feel a negative impact months later and the offer to defer is no longer available, then its like going down a one way street with no option to reverse course. I dislike one way streets because I don't have an option to reverse course, turn back, and self correct. I equate the defer now, then wait-and-see to a two way street which allows you to reverse course by making lump sum. However, the wait-and-see now with intention to defer later, may be going down a one way street if the option no longer exists when you need it.
The right decision will vary from person to person, because our lives and circumstances are unique. However, over the years the philosophy I have applied to my practice has been conservative and best described as "Hope for the Best, Plan for the Worst". In other words, what if one's income is impacted six months later and the option to defer is no longer available, what decision would have been the right one to have made. And when that decision comes with the option to undo or reverse course, then it creates a scenario where we will not likely lead to a regret.
So my advice to Shakespeare is simply, "Thou art to make thy decision which gives thine family options, and art likely to not be regretted." Speak with an Advisor to look at the big picture of your Personal Finance.
Orlando Lopez, CFP, CIM, CIWM
Investment Advisor & Financial Planner
45 Wicksteed Avenue Unit 210
Toronto, ON, M4G4H9
orlando.lopez@rbc.com
www.rbcds.com/orlando.lopez