Zoocasa
Sold Prices
Mortgage Calculator
Map
Market Insights
  • Blog Home
  • For Buyers
  • For Sellers
  • Real Estate News
  • Mortgage News in Canada
  • Free Guides (PDF)
  • Real Estate Infographics
Zoocasa
Home Guest Posts

The Effect of Skipping a Mortgage Payment

Ratehub.ca by Ratehub.ca
November 24, 2022
in Guest Posts, Mortgages
Reading Time: 5 mins read
Skipping a Mortgage Payment
Share11
Tweet
Share4
15 Shares

When you apply for a mortgage, getting the best mortgage rate is just one thing you need to think about. It’s also important to get a mortgage that has features that meet your needs, such as the option to pay down your mortgage early (known as the prepayment privilege).

One feature that many mortgage lenders offer allows you to skip a mortgage payment from time to time. All you need to do is call your mortgage lender a few days in advance and say you want to skip the payment. Many lenders let you choose to skip a payment up to once a year with their approval (late payments or other problems with the conditions of your mortgage could be grounds for them to deny your request).

There are lots of reasons you might want to skip a mortgage payment. An unexpected expense or job loss are two common reasons. Whatever the reason, skipping a mortgage payment helps with short-term cash flow when you’re in a pinch.

But what are the consequences of skipping a payment?

Beware the Fine Print

Surely, mortgage lenders don’t offer this feature out of the goodness of their hearts. In fact, there’s a financial benefit to allowing customers to skip a payment every once in a while. And while you might not realize it, skipping a mortgage payment is actually very expensive.

To uncover the true cost of skipping a mortgage payment, let’s take a closer look at what happens when you use this feature.

How Skipping a Mortgage Payment Works

Your mortgage payment is made up of two parts: The principal (the amount that goes toward paying back the money you owed), and the interest (the amount that pays for you to borrow the money). Every time you make a mortgage payment, some of it pays down the total you owe and the rest pays for the borrowing cost.

  • Read: The Impact of Rising Interest Rates on Home Prices Across Canada

But when you skip a payment, you’re still on the hook for the borrowing cost for that month. And that interest amount gets added to your balance owing. You’re effectively borrowing money to pay for the interest charge—and then paying interest on it!

Let’s look at an example using a mortgage payment calculator.

Imagine you have a mortgage of $500,000 amortized over 25 years with a five-year fixed mortgage rate of 4.84%, which is currently the lowest rate you can qualify for in Toronto. Your monthly payment is $2,863. Since the interest portion of the payment gets smaller over the course of your mortgage, let’s make this easier by assuming you’re skipping the very first payment on the mortgage. That makes the interest portion of the payment $2,017.

Mortgage principal $500,000
Amortization 25 years
Mortgage rate 4.84%
Monthly payment $2,863
Interest portion $2,017
Principal portion $846

As mentioned above, the interest amount gets added back to your outstanding balance when you skip the mortgage payment. Plus, the amount you would have paid doesn’t get applied to the balance. In this example, your total amount owing would go up to $502,017.

Starting balance $500,000
+ Interest owed + $2,017
– Payment made – $0
= New balance $502,017

Since the interest amount is calculated on the total amount owing, the interest portion of your next monthly payment would increase because you’re now borrowing more money. The interest portion of the next monthly payment would be $2,025—$8 more than the interest portion would have been on the first payment.

So skipping a mortgage payment costs $8. Worth it, right?

Interest Adds Up

If that was it, skipping a payment would be a great deal. But there’s more to the story.

Because your monthly payment of $2,863 remains the same over the course of your mortgage term, a greater proportion of the next payment goes toward paying interest, at the expense of paying down the principal. 

Starting balance $502,017
+ Interest owed + $2,025
– Payment made – $2,863
= New balance $501,179

After two months, and making a $2,863 payment, you ended up adding $1,179 to your initial mortgage amount due to the current high cost of borrowing. 

If you absolutely must skip a mortgage payment, your best chance to counteract this effect is by using your prepayment privilege to make up the payment when you have the money. Making an extra payment toward your mortgage has the opposite effect to skipping a payment. 

  • Read: 5 Must-Know Tips to Pay Your Mortgage Off Faster

The entire amount of your extra payment goes directly against the principal (you’ve already covered the interest amount in your regular monthly payment). A lower balance owing reduces the interest portion of your monthly payment, and you end up saving money on interest and paying your mortgage down faster.

It’s Best to Stick to Your Payment Schedule

Even if you think you’ll be able to make up for the skipped payment eventually, we don’t recommend the practice. Not only is it costly in the long run, but it can be easy to get in the habit of skipping a mortgage payment as a way to goose your cash flow rather than fixing the problems that led you to be low on funds in the first place.

If you’re having trouble making your mortgage payments, talk to a mortgage broker about your options. They can help you with options to lower your payments through refinancing.

Published: July 13, 2017
Last Updated: November 24, 2022

Previous Post

Decrease Your Interest Payments and Pay Your Mortgage Faster

Next Post

Three of the Top Family Friendly Neighbourhoods in Calgary

Ratehub.ca

Ratehub.ca

At Ratehub.ca we make it easier for Canadians to choose better personal finance. With the best tools, rates and knowledge to help you take control of your money. Whether it’s a mortgage rate or insurance rate, a credit card, chequing account or high-interest savings account, we are your champions of choice.

Related Posts

A real estate agent handing over keys to new homeowners.
Affordability

8 Tips to Help You Get Your Dream Home in the USA

September 13, 2023
A small cardboard house in a shopping cart.
Canada

Canadian Real Estate Q&As: What Are Mortgage Delinquencies?

August 30, 2023
Coins stacked in increasingly large piles
Canada

Navigating the Upward Climb: Understanding the Current Mortgage Rate Outlook

August 17, 2023

Blog Search

No Result
View All Result

Newsletter Sign-up

Join a community of 130,000+ subscribers. Don't miss important real estate news, market data, and buying and selling tips.

Recent Articles

An apartment interior.

Energy Saving Tips: How to Lower Your Energy Costs as a Renter in Canada

September 22, 2023
An industrial loft living room

In 10 Years This Toronto Multi-Storey Loft’s Price Rose by $836K

September 22, 2023
A couple holding several moving boxes

How to Change Your Address When Moving

September 21, 2023
Mississauga skyline

Toronto’s Promising Surge in Home Supply: Active Listings Have Nearly Doubled in Most of the GTA

September 21, 2023

Featured Listings (Updated Weekly)

Mississauga skyline

Toronto’s Promising Surge in Home Supply: Active Listings Have Nearly Doubled in Most of the GTA

September 21, 2023
A detached house on a sunny day.

Updated: 7 Houses Under $900,000 For Sale in Mississauga

September 19, 2023
A courtyard with wood flooring.

The Most Viewed Homes of August 2023

September 15, 2023
A row of houses.

Median Income and the Type of House You Can Afford: A Provincial Guide

September 11, 2023
first-time home buyer programs and rebates

Social Media

250 The Esplanade Suite 408 Toronto, ON M5A 4J5

Terms of Use | Privacy Policy | Careers | Sitemap | About Us

 

Zoocasa © 2007–2022. The trademarks MLS®, Multiple Listing Service® and the associated logos are owned by The Canadian Real Estate Association (CREA) and identify the quality of services provided by real estate professionals who are members of CREA.

Stay Connected

1-844-683-4663 | [email protected] 

  • Blog Home
  • For Buyers
  • For Sellers
  • Real Estate News
  • Mortgage News in Canada
  • Free Guides (PDF)
  • Real Estate Infographics
No Result
View All Result

Zoocasa © 2007–2022. The trademarks MLS®, Multiple Listing Service® and the associated logos are owned by The Canadian Real Estate Association (CREA) and identify the quality of services provided by real estate professionals who are members of CREA.