June 14, 2020 | Pay Uup

Regular addicts may recall bold blog dog words such as these being published here over the last few weeks:

I am one of the 700,000 Canadians not paying my mortgage at the moment.  Lately you have been bashing those deferring as not having any savings and just spending on Netflix and N95’s and completely house poor.

We have a home worth about $850k and a $265k mortgage.  $300k invested in a relatively B/D self-directed portfolio and $20k in cash. No other Debt. Could I pay?  Yes.  But why be in a hurry when money is so cheap?

My reasoning behind not paying is:
1. Our variable rate on the mortgage is 1.45% – why cash in my BMO stock paying me 6.24% divvies to pay down a mortgage at 1.45% (coincidentally with the same bank)
2. We will be putting a new roof on this summer as well as sending a child off to Uni in September.  If we kept paying the mortgage, by late fall – the cash in the bank might be depleted and we might have to dip into our investments.

Cashing out some of the investments now or in the fall would force us to take a loss.  Should I really have more than $20k in cash and be opting to continue to pay BMO? Not sure you’ll reply but wanted to give you my perspective.  Am I nuts?

Probably. For taking an unnecessary risk – which is the worst kind. With almost a million in net worth and (presumably) a job, how can you not service a $265,000 mortgage at 1.45%? What’s the need to sell stock? That’s only a grand a month, so deferring it for half a year would save but $6,000 in cash flow. The interest, of course, gets tacked onto the mortgage principal – so it grows. Not a great outcome. And this is not the sole cost.

Second, with a portfolio of only $300,000, why’s it full of bank stock? The dividends are nice, but the volatility can be a stress – certainly not sounding like a ‘balanced & diversified’ account. (No normal person should own individual equities with less than seven figures in a portfolio.) As for the kid and the roof, what was the plan before the virus hit? Sounds like Covid and the advent of deferrals furnished an excuse to paper over lousy budgetary habits and sketchy personal discipline. Don’t try to make this sound like a genius financial strategy. It’s not.

Hundreds of thousands of people have deferred payments on $180 billion in mortgages. This is troubling for so many reasons. First, those who would lose their homes after three or four months because they lacked an income, savings, resources, investments or an emergency fund or LOC and could make no payments since they own more debt than equity, made bad choices. They should not own real estate they cannot afford. By doing so they imperiled themselves and their families reaching for an asset obviously beyond their means. They failed. The lenders giving them the financing failed. Society with its maniacal obsession with houses failed. Covid proved this.

When the deferral cliff comes in autumn this will not be a happy time in many lives. Jobs will return, but far more slowly than they were snatched away. We’ll all pay for real estate lust.

Second, those folks who can pay their obligations but chose not to must think they’re gaming the system. The pandemic, they believe, gives cover for sticking it to the bank – diverting money into toys, renos or a TFSA – without consequences. Prepare, ye delusional serfs. This may not end well.

The credit bureaus – Equifax and TransUnion – are doing what they’re supposed to,  recording deferred payments as missed ones. They may well be listed correctly on your credit report but heed these words from mortgage broker Rob McLister: “Mortgage deferrals aren’t supposed to hurt people’s credit scores but when a mainstream lender sees you’ve had a deferral, it’s nonetheless a red flag.”

What does that mean?

Just what you’d imagine. Lenders who note you could not (or would not) make mortgage payments for a number of months could, according to McLister, scrutinize your income and analyze the stability of your job or your employment sector as well as request more documentation about your financial situation. They may also, “Decline you if you have borderline qualifications, particularly if you’re employed in a higher-risk industry.”

Deferrals cost. Lenders you have failed to pay because of the virus will be looking for an explanation why, and may be asking for pay stubs, receipts or contracts to prove income has been restored. Don’t assume your mortgage will be renewed automatically with no questions asked, and certainly don’t try to get refinanced or switch lenders while payments are being deferred.

And good luck trying to repair your credit with the bureaus, which are likely to be overwhelmed in the coming months. These are almost-entirely automated systems with meagre human resources to deal with reporting errors or requests. If you’ve ever tangled with them, you know.

In short, pay your bills. Or get out.

Garth Turner June 14th, 2020

Posted In: The Greater Fool

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