What Happens if You Miss a Mortgage Payment in Canada?

Throughout 2022, Canada experienced numerous interest rate hikes in quick succession, implemented by the Bank of Canada to curb rising inflation and quell an exploding housing market. Although this has sweeping effects across the economy, today, we will focus on one aspect - mortgage payments. In light of a long period of low-interest rates, many Canadians elected to choose a variable-rate mortgage, meaning the interest payments can change as the central rate changes. 

There are several other reasons why someone might miss a mortgage payment, but changes to the variable rate mortgage mean that more people than ever are experiencing missed monthly payments. Missing a mortgage payment in Canada can have serious repercussions.

We’ll look into:

It’s important to try to make every mortgage payment on time, but if you miss a payment, options are available to help you catch up and get back on track. Understanding these issues and how to navigate the situation can help you protect your financial well-being and deftly navigate any problems if they do arise. Let’s start with a quick review of what a mortgage is, and how the payments work. 

What is a Mortgage

Essentially, a mortgage is a long-term loan that is used to finance the purchase of a property. For most individuals, that means a house, although commercial mortgages do exist. A mortgage is a legal agreement in which a lender (typically a commercial or private bank) agrees to loan money to a borrower to purchase a house. The borrower typically has a down payment that makes up some percentage of the home's total cost, with the lender financing the remaining amount. The mortgage borrower agrees to pay back the loan, with interest, over a specified period of time. Check out How Much Mortgage Can I Afford for more details.

These days, you will also need to pass several different requirements to secure a loan, which can include passing a stress test and demonstrating proof of ownership of the house. 

A mortgage is made up of these essential elements:

  • Mortgage principal amount: How much money did the borrower receive from the lender?
  • Amortization: The total time it would take to pay off the mortgage in full. Typically, a mortgage might require multiple terms, each with varying rates, to pay off the total principal. 
  • Interest rate: The fee that the borrower pays to the lender for the privilege of loaning the money. Typically guided by the interest rate set by the Bank of Canada, with some variation depending on if the borrower chooses a fixed or variable mortgage. We covered the difference in depth in the article Fixed vs Variable Rate Mortgages: Understanding the Differences. The interest rate is also affected by other factors, such as your relationship with the lender, the length of the term, your credit history, and the type of lender.
  • Payment frequency: How often you agree to make payments - typically monthly, although other options, such as bi-weekly, semi-monthly, etc., do exist.

Next, let’s look deeper into payment frequency and understand what might cause a borrower to miss a mortgage payment.

Why Might Someone Miss a Mortgage Payment 

 There are several reasons why someone might miss a mortgage payment. Common reasons include the following:

  • Financial hardship: Life can be unpredictable, and even if you were financially stable when you took out your mortgage, you might experience a change in circumstances that makes it difficult to make your mortgage payments. This could be due to a job loss, a medical emergency, or other unexpected expenses.
  • Mismanagement of funds: Some people may simply mismanage their finances and accidentally forget to make a mortgage payment. This could be due to a lack of budgeting skills, or simply getting too caught up in other things and forgetting about the payment. Mismanagement of funds is especially possible if you have recently negotiated a new mortgage plan with a different payment frequency or timing.
  • Disagreement with the lender: In some cases, a borrower may disagree with their lender about the terms of the mortgage agreement and may choose not to make a payment as a result.
  • Variable mortgage: A borrower who selected a variable mortgage may face their monthly payments changing dramatically. This can mean an unexpected increase in monthly payments that the borrower may not have effectively budgeted for.  

How Many Mortgage Payments Can You Miss?

So, you’ve missed a mortgage payment - now what? Well, in Canada, there is not much grace extended for missing payments. As such, you should start making arrangements as quickly as possible to repay your missing payment. Lenders will be in touch reasonably soon after just one missed payment and usually connect you with their arrears department to work out a plan. 

If you do not communicate with the bank, you can expect them to take more direct action after a second missed payment. The reason that these things happen so quickly is that most mortgages do not enter arrears in Canada. Institutions are regulated to use several different controls to anticipate and prevent anyone that shows early signs of potentially missing payments. So, are there any other actions that borrowers can take ahead of time if they expect to miss a payment? Yes, and below we will discuss mortgage payment deferrals.

Deferring a Mortgage Payment (what is it) 

If you cannot make your mortgage payment due to financial hardship or other circumstances, you may be able to defer the payment. This means that you can temporarily postpone the payment and catch up on it later.

To defer a mortgage payment, you must contact your lender and explain your situation. They will then assess your circumstances and determine your eligibility for a deferral. If approved, the lender will work with you to develop a signed agreement and a plan to catch up on the missed payment(s). 

In Canada, lenders typically offer an option that allows you to miss or defer one monthly payment without a significant penalty. Communication is still essential; if you miss one mortgage payment and then pay the next three on time, those three may be considered all late as the lender sees it as you catching up via a “rolling late payment.” 

It's important to note that deferring a mortgage payment is not the same as cancelling it. You will still need to pay back the missed amount at some point, and it will likely accrue interest. Deferring a payment should only be considered a last resort, and you should try to make regular mortgage payments if possible. Even so, it is better to be upfront with your lender and work out a mutually agreeable plan to defer rather than avoiding a tough conversation and missing payments unexpectedly. 

What Happens When you Defer a Mortgage Payment?

 After your deferral period ends, you are expected to continue making your mortgage payments and repay the payments that you deferred. There are a few ways of repaying:

  • Extending the mortgage amortization period so that you end up paying more over a longer period
  • Adding the deferred payments later in the term of the mortgage 
  • Increasing your regular payment amount to cover the missed payments
  • A bulk payment

You will work with your lender to determine a practical repayment plan that works. The lender wants you to continue paying, as going through a defaulting process is expensive and time-consuming.

When Does a Missed Mortgage Payment Get Reported?

As mentioned above, most Canadian institutions will take swift action in the event of a missed payment, particularly if there is no communication from the borrower regarding the situation. Lenders can technically initiate legal proceedings 15 days after your first missed payment. This is atypical, and you will typically expect to receive communication instead informing the borrower about their options. Suppose a borrower does not communicate within 30 days of a missed payment. In that case, the lender will report that the mortgage is in arrears, dramatically affecting the borrower's credit score. The reason that these things happen so quickly is that most mortgages do not enter arrears in Canada. Institutions are regulated to use several different controls to anticipate and prevent anyone that shows early signs of potentially missing payments. So, are there any other actions that borrowers can take ahead of time if they expect to miss a payment?

If you have missed a mortgage payment and are concerned, it's a good idea to contact your lender and see if you can work out a plan to catch up on the missed payment. Communication is key, and lenders would prefer to work out a practical solution rather than engage in complex legal proceedings. If you can do this, it may help mitigate the impact on your credit score.

If you have further questions about deferring payments or have specific questions about your mortgage, Loyal Homes is here to help. Our team of Client Care Coordinators can provide quick answers to most questions and connect you with our network of experts if you require more specific advice about a missed mortgage payment. 

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