We all embrace the fact that the more we can add to our basic mortgage payments, the sooner we not only shorten our amortization, but also dramatically reduce interest costs over the life of the mortgage.
I was therefore quite shocked recently to see my favorite major bank, of which I am both a customer and an investor, commencing huge ads with the banner “Take time off from your mortgage payment – for up to four months!”
At a time when the average Canadian family carries a total debt twice that of their after-tax income, and 30 per cent are planning to carry debt into retirement, one can only hope that very few are tempted to jump at this offer of deferred mortgage payments.
Consider this example: A couple has a $250,000 mortgage at four per cent, with a five-year term and a 20-year amortization. They take advantage of the bank’s offer and defer their regular $1,510 monthly payment for four months – making $6,040 available for a nice family holiday to Hawaii.
Good decision? Not likely!
Assuming, once they resume payments, that the interest rate and payments stay the same for the remaining mortgage life, the couple will eventually have added, compared to their no deferment alternative, $13,424 to the total amount paid.
This means that their Hawaiian holiday actually cost them not only more than twice the saved payments, but also added about nine months to their previous 20-year amortization.
Accepting the bank’s offer would not be in the best interest of most borrowers.
For the mortgage holder, the increase in costs reflects the magic of compounding at work — this time, to the advantage of the lender, and the distinct disadvantage of the borrower.
Mortgage holders are always better served to, as much as possible, add to their payments, accelerate their frequency and even make periodic extra lump sum payments.
Ideally, they should do all three.
No matter how low the interest rate, every outstanding dollar owing on a mortgage, or on any other debt, continues to attract that rate year-in and year-out until the last dollar is repaid.
Debt may be a necessary evil when one is young or with a growing family. As one approaches or enters retirement however, debt should be viewed as an absolute enemy — to be avoided at any reasonable cost.
Obviously, life happens. In a real family emergency, a $6,000 mortgage deferral might go a long way toward solving the problem. In such a circumstance the bank’s offer of a four-month payment “holiday” could well be the best answer. Do not however, be coaxed into deferring mortgage payments only to indulge lifestyle dreams.
A retired corporate executive, enjoying post-retirement as an independent financial consultant, Peter Dolezal is the author of three books. His most recent, The SMART CANADIAN WEALTH-BUILDER, is available online and in bookstores.