Mortgages: How do I skip a mortgage payment in Canada?
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Sometimes we all need a little extra breathing room in our finances, and there are times in our lives when not having to pay the mortgage for a month can really make all the difference. Whether it’s a sudden, unexpected home repair or your boss has suddenly decided that you won’t be getting that promised promotion so you can’t afford to take that family vacation anymore, unexpected financial burdens are horrible, and we all have to deal with them.
On the bright side, many mortgage products offer the ability to skip a payment in their terms and conditions. However, accepting the lender’s offer may not be a good idea. Let’s see if skipping a mortgage payment is a good idea…
Skipping your mortgage payment – the ins and outs
The normal offer from lenders is the ability to skip about 1 to 4 months of mortgage payments each year without any problems occurring. If you decide to accept the lender’s offer, you will choose not to make any payments of principal and interest. This means that you will actually take longer to pay off your mortgage if you choose to do so. When you skip a mortgage payment, not only are you giving up the ability to pay off your loan, but the interest continues to accumulate and add to your total loan balance.
For example, on January 1, 2020, you took out a $350,000 mortgage to buy your home. It has an interest rate of 3.5% and your monthly mortgage payment is $1,800. If you choose not to make a monthly payment, you could avoid paying $1,800 in one month. However, the $350,000 mortgage is now $351,000 instead.
So clearly, in the short term, skipping a mortgage payment may seem like a good idea. However, this practice can have quite a negative impact in the long run, especially if you decide to repeat it several times during the amortization period of your mortgage.
The major problem with skipping a mortgage payment is that you will still see the result of it by capitalizing your interest. This is the action of interest added to the balance of a loan. Therefore, the increase in your loan balance will also result in interest payments until your loan is finally paid off. Skipping a single month over the entire term of your mortgage, such as 25 years, could result in an increase in interest of more than $1,000.
Repayment of skipped payments on a mortgage
Skipped payments can be refunded if you choose to do so without penalty. However, to repair the damage caused by not making the payment, you will have to repay your monthly payment and the additional interest you have accrued for not making your payment.
Is skipping a mortgage payment a good idea?
We can all face financial crises in our lifetime that require us to be a little more flexible with our mortgage payments. Skipping a few months of mortgage payments can certainly give you freedom in difficult times, such as losing a job or in the midst of a financial crisis. However, over the long term, the amount of interest you will pay over the life of your mortgage can increase significantly.
Therefore, skipping a mortgage payment is never recommended unless necessary. It’s important to sit down and really think about the potential consequences and decide if it’s worth adding years to your mortgage term by skipping a few months.
How to Qualify to Skip Mortgage Payments
So you’ve decided to skip a few mortgage payments, but how do you qualify? First, you need to make sure there is a statement in your mortgage terms and conditions that gives you the option to skip a payment. Most lenders require the following to skip mortgage payments:
- You can’t be late with your mortgage payment. This means that you cannot have skipped more than one of your mortgage payments.
- The current mortgage balance and the payment amount you wish to skip cannot exceed the original total of your mortgage.
In addition to the above, if you have a high ratio mortgage, it is unlikely that you will be allowed to skip mortgage payments. Any purchase of a property for which you have decided to make a down payment of less than 20% can be considered a “high ratio” mortgage. Also, it is unlikely that you will have the ability to skip payments if you are considering a 10-year mortgage.
What you need to remember
Always keep in mind that skipping a mortgage payment is not free money. RBC states on its website that there is no fee for skipping a payment, which makes the idea of skipping mortgage payments seem like a no-brainer. While your monthly payment will not change during the term of your mortgage, it is likely that your monthly payment will increase when you renew your mortgage.
It’s worth talking to your lender before you decide to skip a mortgage payment to understand the potential repercussions and to make sure you don’t accidentally default on your mortgage or ruin your credit rating.
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