We have been paying an extra $600 per month on our mortgage since we moved into our new house last summer. We are taking advantage of increased payment options to reduce our total interest costs and pay down our mortgage faster. Our goal is to pay off our mortgage in less than 15 years.
Apparently our bank doesn’t think this is such a good thing. I received a note last month from TD Bank informing me that I’ve won a vacation – a mortgage payment vacation, that is. I’m going to explain what a mortgage payment vacation is, and why it’s a bad idea:
Mortgage Payment Vacation
The note from TD Bank said that I may apply an approved amount that I already prepaid to a maximum of 4 consecutive monthly or equivalent to monthly regular mortgage payments for a mortgage payment vacation. Interest continues to accrue during the mortgage payment vacation.
Since we’ve already prepaid the equivalent of 2 or 3 extra mortgage payments, the nice folks at the bank figure we can take a break for a few months while the interest builds back up.
It seems like the banks are trying every marketing tactic they can in order to make more money in this low interest rate environment. No wonder Canadians are in trouble when it comes to household debt.
The Sales Pitch
I was curious to hear more about taking a mortgage payment vacation so I checked out TD’s website for more information. They have a whole exercise dedicated to this feature:
If you’re planning for a big or life-changing event like staying home with a new baby, taking a sabbatical from work, taking an extended trip or pursuing your studies while working part-time, a mortgage payment vacation is a good option to consider.
Ken and Cheryl are expecting their first child. They meet the eligibility requirements and would like to take a mortgage payment vacation during their parental leave. To do so, they’ll need to accumulate a prepaid amount in the time before baby arrives.
Here’s how this works:
Ken and Cheryl’s regular monthly mortgage payment is $902 per month. Ken and Cheryl would like to take a mortgage payment vacation for 4 months while they’re on parental leave. Their prepayment goal is $3,608 ($902 x 4 months).
Ken and Cheryl have 9 months to prepay $3,608. They will need to pay an extra $401 per month, so their monthly mortgage payment over that time will be: $902 + $401 = $1,303 per month.
Now they can apply any prepaid amounts accumulated from lump sum payments or accelerated payments to take a break from their mortgage payments for up to a 4-month period.
This feature is available on new mortgages, or when you renew your existing mortgage. You must have accumulated the prepaid amount by taking advantage of prepayment privileges.
Mortgage Payment Vacation – A Bad Idea
A mortgage payment vacation results in interest capitalization. This means interest will be added back onto the outstanding principal on your mortgage.
TD Bank also says that, if necessary, they will adjust the amortization period remaining at renewal so that the mortgage does not exceed the original amortization period remaining. This may result in an increase to the amount of your regular payments after the renewal.
The bottom line is that taking a break from paying your mortgage is a bad idea. The banks are trying to turn your good savings habits into bad ones. They’re making it too easy for people to get sucked into the debt trap forever.
It’s pretty obvious that Ken and Cheryl should just set aside the extra money in a high interest savings account every month until their ready take parental leave. They can continue to make their monthly mortgage payments, and maybe they can treat themselves to a real vacation when it’s paid off.