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For most Canadians, the largest payment made each month is the mortgage payment. If things start to get tight financially, the last bill that we would or should let lapse every month is that mortgage payment. Why? Because that is our home – the last thing that we would let get away from us.
Part of the reward of moving from the rent cycle to homeownership is the ability to build equity in an investment that will appreciate over the years. However, with that reward comes the responsibility of making mortgage payments each month, on time. Depending on the paperwork in your mortgage, missing a payment can have a number of implications.
When you are renting, going late a couple of days got the landlord’s attention quickly. Within a few days of the rent due date, if you still had not made your payment, a late fee was tacked on. Notices went up on the door of your apartment or house, to get your attention. With a mortgage payment, if you miss just one, no one comes by and knocks on the door asking for the cheque or payment, but you are generally contacted pretty quick in one fashion or another. However, banks and mortgage lenders can end up being much less forgiving, ultimately, than landlords.
If you think about it, whoever has extended you the financing to buy a house has made a major investment in your future. You did not have the money on hand to buy the house outright (and the vast majority of Canadians don’t have it either). So you went to a bank, credit union or private lender and took out a mortgage. It is true that whoever lent you the money is making money off the interest, but you are still living off their money to a large degree, so making your mortgage payment each month is not just the responsible thing to do, but the right thing to do.
So what happens when you are late with a mortgage payment?
Technically, a payment that comes one day late could put you into default, depending on the wording of the contract with your mortgage lender.
But if you are late with a payment, something has likely already happened in your life, well ahead of that due date, that made your payment late. Maybe you lost your job…maybe your spouse lost hers…and in either case you have been dipping into savings for months. Maybe someone in your family is suffering from a major illness, and you have been helping out with their expenses, and your own finances are suffering as a result. Maybe you are going through a divorce and have not had the money on hand to pay many of your other bills.
In just about all cases where a mortgage payment is late, the borrower has already had other credit accounts go late, whether those are credit cards or even car payments. The best thing to do, with respect to a mortgage, is to reach out to the bank or lender when you have that first sign that trouble is coming. It is best to do this before you are late with a payment so that you can work out some alternative arrangements. Lenders are much more likely to deal with you if you have not yet missed a payment, because they appreciate people who take a proactive approach. Remember, they have made a major investment in your future – and foreclosure is an expensive approach, which often leads to them going a few months to year (or more) without receiving any money on your mortgage.
In cases where you did not put at least 20% down on the mortgage, and you have insurance through the Canadian Housing Mortgage Corporation (CMHC), you can also reach out to them to help solve the problem. They have access to such remedies as switching from a variable rate loan to a fixed-rate loan to make your payments more predictable, or deferring payment or two over the short term so that you do not lose your home. Other mortgage insurance companies may have access to similar remedies to help avoid foreclosure.
What can make a mortgage payment go late?
Sometimes the late payment is the result of a simple mistake. You might have forgotten to transfer money from savings to chequing, and the cheque for your mortgage bounces. Other common causes include:
Loss of job
Change of job
Family illness or death
Divorce or other relationship problems
What is the definition of a late mortgage payment?
This might seem like a simple question, but since it is an important technicality, let’s take a look at it. No matter whether your mortgage is weekly, bi-weekly or monthly, there are due dates attached to it. If you don’t make your payment by midnight on the due date, it is late. If the due date is April 1, 2020, then April 2, 2020, is late, even if you wake up early that day and make that payment. If the lender makes the report to the credit bureaus, then your score will take a hit, and there is no way to appeal it away.
The hit to your score for one late mortgage payment will not be significant. However, if you get behind and start making the payment late each month, a “rolling late mortgage payment” starts to hurt your score even more. Your report could show 11 missed mortgage payments over the course of a year – even if you make all of your payments, just making them a couple of days late each. So if you pay it each month, but it is four days late each month, you can also end up paying a late fee each month – taking money out of your own pocket, for no good reason. Also, that hurts your score over time. That also leads to spending more on interest expense over the life of the loan that you need to.
When can you skip a mortgage payment?
This will depend on the terms of your mortgage. Some contracts allow for homeowners to skip the equivalent of one month’s worth of payments each year. This means that if you make monthly payments you can skip once a year; if you pay bi-weekly you can skip two payments; if you pay weekly you can skip four payments. The Royal Bank of Canada (RBC) is one lender that offers this opportunity, so long as the mortgage is not already in arrears and the current balance, along with the payment amount that the borrower wants to skip, does not exceed the amount of the original mortgage.
Of course, if you choose to skip a payment, you are missing a chance to drive the principal of the loan down. It is a nice option to have if things get tight, though. However, you are still liable for the interest on the skipped payment, which will add to the balance of your mortgage. So it does not make sense to take advantage of the opportunity to skip a payment so that you can go on vacation or buy an expensive purse.
How can you figure out how much mortgage you can afford in the first place?
Put together a budget for yourself each month – before you start looking for a house. Get estimates for utilities, property taxes, mortgage insurance (if you do not have 20 percent to put down), the loan itself, as well as savings in case of repairs (if you own a house, you have to fix it yourself – not just call the landlord). It is a mistake to buy a house before you have six months of living expenses in savings, and this is based on your homeownership budget, not your current budget because life happens…and foreclosure stays on your credit report for up to 14 years.
Don’t panic – and don’t give up on the dream of homeownership. However, start taking the steps now to prepare yourself financially for living with a new level of responsibility.