Can you afford to take a year off?

Helen Morris, National Post · Saturday, Sept. 11, 2010

As the summer draws to a close and our vacation away from the office feels like a distant memory, thoughts may turn to taking a longer sabbatical. Perhaps you have always had a burning desire to write a novel. In order to determine whether you can afford to take a year off to write the next War and Peace, you will need to take a good look at your finances– and that includes the mortgage.

“Sit down with a mortgage advisor, a financial planner and really take a look at how you’re going to go about taking a financial holiday and ask yourself if you can truly afford it, then figure out a strategy,” says Jim Rawson, regional manager of Invis mortgage brokerage firm in Toronto. You might have several options, “whether it be that you have saved [for] payments, or whether you need to refinance your mortgage to have some money put aside for those rainy days.”

Depending on the level of equity in your home and your own credit record, some lenders may allow you to take a holiday from payments.

“The payment holiday is going to be based on the parameters of your mortgage and your credit quality. If you happen to have a 30% loan to value and you’ve decided you want to take a year off … your mortgage lender could probably be convinced to capitalize the payments for that 12-month period without any real risk to them,” says Peter Veselinovich, vice-president of banking and mortgage operations at Investors Group. “The interest amount would be added to principal on a monthly basis, as opposed to you actually making a payment, so your principal balance on your mortgage would go up over that period of time.”

Your cash-flow situation improves but the cost will be higher interest payments over the lifetime of the mortgage.

If a complete payment holiday is not an option, there are ways to plan ahead for reducing mortgage payments.

“If you’ve got a mortgage and it’s registered for a 35-year amortization, say, your payments are $1,000 and you could afford $1,600, pay that,” says Paula Roberts, a mortgage broker for Mortgage Intelligence in Unionville. “The extra money will go right towards principal and reducing the amortization. [If ] all of a sudden you need to take some time off, you can reduce your payments to the $1,000 [without re-negotiating the loan]” she says. “You’re not in arrears and all you’ve done is started from a 35-year amortization, gone to a 25-year amortization, and then you just go back to a 35-year amortization.”

Ms. Roberts says some lenders will allow you to attach a line of credit to your mortgage, which you can use to finance payments during your sabbatical.

However, Mr. Veselinovich cautions that a line of credit may not provide the best interest rate and, during and after the sabbatical, you will now have additional payments on top of your regular outgoings.

Income from other investments could also help to fund a sabbatical.

“This is part of an overall planning scenario that takes into account that [the sabbatical] is one of the goals you wanted to achieve,” Mr. Veselinovich says.

If you take funds from your RSPs while you have no other employment income, you will pay a lower tax rate.

“If you were at a marginal 42% tax rate and it drops to 25%, that makes a big difference in how much you keep in your pocket,” Mr. Veselinovich says. “But you’re stealing from Peter to pay Paul, if this was your retirement [fund].” Have a post-sabbatical plan in place, he says, to replace the retirement funds.

“You’ll get yourself back on track and have had the opportunity to take that sabbatical,” says Mr. Veselinovich.
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