What is a mortgage deferment?

We explain what a mortgage deferment is and how to request one.
A mortgage deferment is a period during which it is possible to pay lower monthly installments. During this period only the interest will be paid, or payment of the installments may even be postponed entirely. This deferment period may be granted by a bank in situations where it seems appropriate to temporarily reduce or suspend the installments being paid, so that the borrower will be better able to cover future payments on the mortgage. A deferment must be requested from the bank, which will perform a study of each individual situation.
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The deferment period can range from a few months to more than five years depending on the terms and conditions of the mortgage loan and what the bank offers. In cases where it is agreed to pay only the monthly interest, the installment may be reduced by approximately 50%, depending on each case.

The mortgage market is very diverse and it is hard to establish standards in relation to the terms of these deferments: some banks will offer only a few months of deferment while others may offer more than 5 years, and some do not provide this option to their customers at all.

 

How much does a mortgage deferment cost?

To explain how a mortgage deferment operates, let's take a look at the following example: mortgage of €120,000 over 20 years, with a Euribor interest rate of +1.25% (variable APR of 2%) and a monthly installment of €564.65. If we request a 24-month deferment from our bank, we would pay €123.70 per month, which represents almost a 79% reduction of the installments. After the loan deferment period, the remaining monthly installments will be €619.98 (provided the interest rate does not change), 9% more than the original installment before the deferment.

Requesting a deferment period for a mortgage loan increases the final cost of the mortgage. Although clearly the monthly installment is considerably reduced during the deferment, after returning to the original terms of the mortgage the monthly amount that must be paid will be higher than it was originally. In other words, since during the deferment only the interest on the mortgage loan was being paid, after returning to the normal conditions more interest will be paid since the outstanding amount is higher than it would have been with normal repayment without the deferment.

Furthermore, requesting a mortgage deferment requires a novation. In other words, the terms and conditions of the mortgage must be renegotiated. Most banks charge a fee for this, which tends to be about 1% of the remaining amount of the loan, and always with a minimum amount that will depend upon the bank involved.

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Who can opt for a mortgage deferment?

If your bank is willing to consider the option of a deferment, certain conditions must be met, including the financial situation of the borrower.

Therefore, if you are considering requesting a mortgage deferment, it is crucial to ask your bank about the possible terms and conditions involved. However, you must also remember that this is resource meant to provide temporary relief for a family's finances, and one which has both benefits and drawbacks.

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