Should I continue deferring my loan or re-start repayment?
By ATB Financial 10 July 2020 4 min read
The pandemic isn’t over, but when it comes to financial prospects and job security, Albertans may have a clearer idea of where they stand than they did at the onset. If you’ve taken advantage of a loan deferral program during COVID-19, you may be wondering recently whether or not you should continue to defer payments. Making an informed decision about your loan deferral now, can help you carry an increased level of financial stability into the post-pandemic future.
Here are a few key considerations to keep in mind:
3 reasons to start repaying your deferred loan
1. You’ll reduce the total amount of interest to pay.
It’s important to remember that even though your payments may have been deferred, interest is still accruing on the principal amount of your mortgage, loan or line of credit. While ATB will not compound interest (meaning we won’t charge you interest on top of your interest) during the deferral period, the longer you defer payments, the more interest you’ll have to pay off later. Unless you’re able to increase the rate at which you pay off your loan after the deferral period ends, every month you defer means an increase in the total amount of interest you’ll pay.
2. You’ll pay your loan off sooner.
On deferred single- and multi-term loans (excluding mortgage loans), the amortization period (the total time you will have to pay off the loan) will be extended to account for the deferred payments and the additional interest that accrues on your principal. This means that with every deferred payment you’re essentially borrowing from the future and keeping your future self in debt longer.
3. You’ll prevent increased minimum payments in the future.
Mortgages (unlike ordinary loans) cannot have their amortization period extended. This means that even if you’ve deferred mortgage payments, the loan will still need to be paid off in the same amount of time. As a result, the amount of your deferred payments will be added to future payments—in other words, once your mortgage is renewed, you’ll be paying a little extra every month to account for every deferred payment. Starting repayment earlier can keep the increase in your future mortgage payments to a minimum.
2 reasons to continue deferring your payments
1. You’ll avoid going into high-interest debt.
Maybe you’re not worried about your ability to make payments when the deferral period ends, but your loan deferral is giving you a bit of wiggle room, enabling you to avoid racking up your credit cards. This can be a good strategy in the short-term, but if you’re unsure about whether the long-term effects on your deferred debt are worth the immediate benefits, please connect with us. We can help you explore your options and figure out the best course of action.
2. You’ll maintain necessary financial stability in the short-term.
If deferred loan payments are the only way you’re continuing to be able to pay your bills and care for your family, the necessities of life in the immediate future may be a much bigger priority for you than minimizing your amortization period or future payments. However, it’s still important to have a plan for the future. Maybe your employment status has changed, or other aspects of your life have become less stable. If you’re concerned about not having sufficient funds available when your payments resume, or you’re worried about the viability of your debt over the long-term, please connect with us before the end of the deferral period—one of our advisors can work with you to explore more manageable options for your situation.
2 questions to ask yourself before you decide
1. What does my financial situation look like now?
Assess your finances as they are now. How much income do you have from employment? How much from government assistance? What are your monthly household expenses? Are there any other expenses coming due in the near future (property taxes)? Have you depleted your emergency fund? Are you continuing to contribute to a savings plan? Use our handy budgeting worksheet to figure out where you stand, and how your situation would change if you started making loan payments again.
2. What do I expect my situation to look like a few months from now?
Make some educated projections for the future. Do you expect your employment status to change? If you’re collecting government assistance, how will the eventual termination of that assistance affect your cash flow? Will your household expenses go up or down? Are you planning to buy or sell a piece of property? Do you have savings to draw on? How would starting to repay your loan now change your projections?