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How to skip a mortgage payment in Canada?

Sometimes all of us need a little bit of extra wiggle-room on our finances, and we will go through times in our lives where managing to not have to pay the mortgage for one month could really make a world of difference. Whether it be a sudden unexpected repair on the house required or your boss suddenly decided that you weren’t going to get that promotion you were promised, so you can no longer afford to take that family holiday, unexpected financial burdens are horrible, and we all have to face them head-on.

On the bright side, many mortgage products offer the ability to skip a payment within their terms and conditions. However, it is possible that taking the lender up on this offer isn’t a good idea. Let’s dive into whether skipping a mortgage payment is a good idea…

Skipping your mortgage payment - the ins and outs

The normal offer put forward by lenders is the ability to skip around 1 to 4 months of mortgage payments each year without any issues coming up. If you decide to take the lender up on this offer, you will be choosing not to make a principal and interest payment. This means that you will effectively take longer to repay your mortgage if you choose to do this. When you skip a mortgage payment, not only are you foregoing the ability to pay down your mortgage but also the interest will still accrue and be added on top of your total mortgage balance.

As an example, on January 1st, 2020, you took out a mortgage of $350,000 to purchase your home. This had an interest rate of 3.5% attached to it, and your monthly mortgage payment comes out to $1,800. If you were to choose to skip a monthly payment on this, you would manage to avoid paying $1,800 in a singular month. However, the $350,000 mortgage is now more like $351,000 for the privilege.

Therefore, it is clear to see that in the short term skipping a mortgage payment may seem like a good idea. Still, it can have some quite negative long-term repercussions, especially if you choose to do it several times throughout your mortgage’s amortization period.

The key issue with skipping a mortgage payment is that you will still see the result in capitalizing your interest. This is the action of interest added to a loan balance. Therefore the increased amount to your loan balance is also occurring interest payments all the way until your mortgage is finally paid off. Skipping just a single month over the whole lifetime of your mortgage, for example, over 25 years, could result in more than $1,000 in interest increases alone.

Repaying Skipped Payments on a Mortgage

It is possible to repay your skipped payments if you choose to do so without a penalty. However, to reverse the damage caused by skipping the payment in the first place, you will need to pay back your monthly payment and the additional interest that you accrued for the ability to skip your payment.

Is Skipping a Mortgage Payment a Good Idea?

We can all face financial crises in our lives, requiring us to have a little more flexibility with our mortgage payments. Participating in a few months of skipped mortgage payments can really give you the freedom during tough times such as losing a job or the peak of a financial crisis. However, there can be significant increases in the amount of interest you will be paying over the lifetime of your mortgage in the long term.

Therefore, it would never be recommended to skip a mortgage payment unless necessary. It is important to sit down and really think about the potential consequences and decide if it is worth adding years to your mortgage’s length by skipping a few months.

How to Qualify to Skip Mortgage Payments

So, you’ve decided that you want to skip your mortgage payments, but how can you qualify? First of all, you need to make sure there is a privileged statement written in your mortgage’s terms and conditions, which gives you the ability to skip a payment. Most lenders will require the following to qualify for skipped mortgage payments:

  • You cannot be in arrears on your mortgage. This means that you cannot have already missed more than one of your mortgage payments.
  • The current mortgage balance and the payment amount that you wish to skip cannot exceed your mortgage’s original total.

On top of the above, if you have a high-ratio mortgage, you are unlikely to qualify to be allowed to skip mortgage payments. Any purchase of a property where you have decided to put less than 20% as down payment could be deemed a “high-ratio” mortgage. Also, you’re unlikely to have the ability to skip payments when looking at a 10-year mortgage.

What You Need to Remember

Something to always keep in mind is that skipping a mortgage payment does not constitute free money. RBC states on their website that “there is no fee to skip a payment,” which makes the idea of skipping mortgage payments seem like there’s no downside. While it is true that your monthly payments won’t change during the term of your mortgage when you come to renew your mortgage, likely, your monthly payment will then increase, so be sure to consider what your future financial position will be like.

It is worth discussing with your lender before deciding to skip a mortgage payment to fully understand the potential repercussions and make sure you don’t end up accidentally defaulting on your mortgage or ruining your credit score.

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