Note: This article may be of heightened interest to Canadian’s during the current COVID-19 pandemic. The current situation is unfolding rapidly, and this article contains general information only.
For up to date information on missing payments during the pandemic, read this article instead. For the most reliable information and latest news on the virus in general, visit the Government of Canada’s website.
There’s one feature that some lenders offer with their mortgage: The option to skip a payment. While it could be helpful in times of financial duress, it comes with some consequences. Take a look at how it works, what it could cost you, and what to consider before making the decision to refrain from making one of your regular mortgage payments.
How does the skip-a-payment feature work?
Many of Canada’s mortgage providers offer products that allow homeowners to skip anywhere from one to four mortgage payments a year. If you find yourself strapped for cash, this is obviously a tempting offer. However, skipping a payment means not putting any money towards your principal loan amount or interest charges—and the payment you’re missing is still being charged interest, which will all be added to your total mortgage balance.
If you skipped your payment, you miss the chance to pay down your principal plus your interest as well as the opportunity to lower the overall remaining balance of your mortgage. Instead, that interest is added to the principal so your balance will actually increase by not making that payment.
How does skipping a payment affect a mortgage in the long term?
Skipping even just one payment throughout the life of your mortgage results in interest capitalization; this is when your interest is added to the balance of your loan (as shown above), which is continually charged more and more interest, until the day you make your final payment.
Can skipped payments eventually be repaid?
The short answer is yes—you can repay a skipped payment at any time without penalty. However, to avoid it drastically affecting how much interest you’ll pay over the life of your mortgage, you should also pay the additional interest accrued from that missed payment.
What are the eligibility requirements to skip a payment?
If the option to skip a payment is written into your mortgage’s terms and conditions, you’ll just have to meet a couple of criteria. First, your mortgage can’t be in arrears (meaning you can’t have missed one or more payments in a row) and, second, the current balance on your mortgage plus the payment amount you want to skip can’t exceed the original amount of your mortgage.
So, is it a good idea?
This is an entirely personal decision, but one that should be made with a couple of factors in mind. Skipping a payment can certainly offer you some immediate cash-flow relief during an unexpected financial crisis, but it’s important to remember that the relief is (a) temporary and (b) more costly to you in the long run, if you don’t pay back that skipped payment plus interest later on. As well, if you’ve been making extra payments towards your mortgage prior to thinking about skipping one, opting to do so could reverse all of your extra work!
If you find yourself on a tighter budget than you were when you entered your current mortgage term, another alternative to consider is to refinance your mortgage. Going that route, you can either access some equity or get a lower mortgage rate/monthly mortgage payment. To discuss your options, contact a mortgage broker near you. And make sure to check a mortgage affordability calculator to make sure you can afford to have a mortgage.