The Best Way to Deal with Missed Mortgage Payments

Posted On August 30, 2024

It happens more often than you may think. Sometimes, you are just not able to make your mortgage payment – maybe a few in a row.

Rather than stressing about how it may affect your finances, homeownership and lifestyle, understand what happens if you miss a payment. Or two.

This article helps you learn what is likely to happen when you miss a payment, how to handle the situation, and what the Financial Consumer Agency of Canada (FCAC) expects banks to do to assist you.

What Happens When You Miss a Mortgage Payment?

Before we tell you how to deal with missed mortgage payments, let us discuss what happens when you miss one.

Late Fees and Negative Impact on Credit Scores

The first consequence of a missed payment is a late fee – this is somewhere between $25 to $50, depending on your mortgage agreement. Usually, a grace period of 2 weeks is allowed for a borrower to pay before this late fee kicks in.

However, if the payment isn’t made within 30 days, you are officially a defaulter, and your lender will report the missed payment to the credit bureaus.

This will affect your credit score, and not in a good way. Even worse, the late payment info will stay on your credit report for up to seven years, no matter if you make up the missed payment later.

Default & Risk of Foreclosure

A mortgage is considered default if a payment is not made within 30 days after the due date.

This is a serious state of affairs potentially leading to foreclosure (in 120 days). Foreclosure is when your lender taking legal action to recover the monies owed by selling your home, is not in the best interests of the bank or the borrower. It is a lengthy and expensive process, and it should be the last-resort option.

In some provinces like British Columbia, Alberta, Manitoba, Saskatchewan, Quebec, and Nova Scotia, the foreclosure process is preferred. Known as judicial sale, the process can take up to a year sometimes.

In other provinces including Ontario, foreclosure is known as a power of sale. Here, the defaulter gets 35 days to catch up on missed payments before the lender can sell the property without going through the courts.

Rolling Late Payments

This is something that not many people know of – rather, they did not read the fine print.

You may think that after missing a payment one month, you can just resume paying the next month and you are safely back on track. Unfortunately, that is not the truth.

The payment you missed is still assumed to be a late one. Each subsequent payment will also be considered late – the only way out is to make extra payments so that you catch up with all pending payments.

This situation is somewhat deceptively called “rolling late” – Avoid getting into this circumstance as you will end up with cumulative late fees and further damage to your credit score.

Dealing with a Missed Mortgage Payment

Moving on from what happens after missing or defaulting on your mortgage payments, let us talk about how to mitigate the consequences.

Be Proactive

Trust us, this is by far the best way.

If you know or even if you just think that there is a chance that you may miss a payment, contact your lender immediately.

In Canada, most lenders will work with you if they know you’re facing financial difficulties. In fact, FCAC expects them to help you.

If they are appraised of your predicaments (in as much detail as possible!), they may provide working solutions to help you avoid default. Remember that it is a messy situation for everyone involved and it is in their best interest to help you get back on track as quickly as you can.

Make a Payment ASAP

Again, a no-brainer. You must try your best to make up missing payments as soon as possible.

There is a possibility that the lender may accept the payment without a late fee if you are prompt. However, if the situation is not so easily managed, they may help you design a repayment plan, adjust the terms of your mortgage, or offer a temporary deferral.

Get Professional Advice

This may seem like throwing good money after bad. But it is a sensible plan of action.

If your living and financial situations have changed drastically and there is no way that you can keep up, consult a professional.

They will provide advice on how to avoid foreclosure or even, bankruptcy – a situation that will hit your credit score and lifestyle very hard.

FCAC Has Your Back!

Like we said at the beginning of this article, you are not alone. And there is support available for people who may have challenges meeting their financial commitments.

The Financial Consumer Agency of Canada (FCAC) has clear expectations for banks and other federally regulated financial institutions. FCAC’s Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances lays down the expectations for defaulters in exceptional circumstances, including high household debts, increased living costs, or rapid interest rate hikes.

Banks are expected to monitor their borrowers for early signs of mortgage default and encourage you to share any financial setbacks. In addition, they should proactively offer support, including mortgage relief measures.

Potential Relief Measures

Banks and other lending institutions are duty-bound to offer relief measures that are tailored for potential mortgage defaulters. However, you must thoroughly understand the additional costs and implications before you accept.

The most common option is to defer payments. Generally, this allows you to pause mortgage payments for up to four months (depending on your mortgage terms). However, there are the inherent risks of increasing the total amount you owe and extension of the mortgage term.

A similar option is to extend the amortization period, lowering monthly payments but leading to higher interest costs.

Other payment arrangements are reducing payments temporarily or capitalizing missed payments into your mortgage principal. Interest-only payments are an option too, allowing you to pay only the interest and not the principal amount.

In all cases, the bank is expected to work with you and restore the original mortgage term within a reasonable timeframe.

If You Have to Sell?

Sometimes, there is no other way out but to sell your home.

Though it is a difficult situation, it may well be the best option to avoid further financial setbacks. In such cases, your bank must provide clear information about the process and the factors involved in selling your home. They may also offer temporary relief measures, such as waiving prepayment penalties.

Mortgage Renewal

If you are close to mortgage renewal, the bank is expected to ensure that the renewal terms are appropriate for you. Taking advantage of your inability to adjust your current mortgage agreement or qualify with other lenders is frowned upon.

Take Control!

It is overwhelming to face financial setbacks and it can seem catastrophic if you miss a mortgage payment.

Bear in mind that you do have options.

Be proactive and communicate openly with your lender. Consult a lawyer or a mortgage broker if necessary to help you overcome these challenges.

Take control of the situation and work in tandem with your bank to retain your home and financial stability.

Do feel free to contact us if you have any questions.

FAQ Section

What should I do if I’m about to miss a mortgage payment?

If you’re about to miss a mortgage payment, contact your bank or lender as soon as possible.

This proactive approach allows them to offer you support tailored to your circumstances, such as a repayment plan or temporary relief measures. This is much better than missing a payment and prevents negative consequences like late fees or credit score impacts.

How many mortgage payments can I miss before my home is at risk of foreclosure?

Technically speaking, even a single missed payment can be a cause for foreclosure. However, in practice, lenders usually wait until multiple missed payments – a period of 3 to 6 months. This depends on the lender’s policies though foreclosure is almost always the last option to be considered.

It is in the best interests of everyone involved to try remedial measures.

What is the “trigger rate” in a mortgage, and why does it matter?

The trigger rate is the interest rate at which your mortgage payment is only paying the interest, with no portion going toward the principal. This applies only to variable-rate mortgages.

This matters because this means you need to either increase your payments, add unpaid interest to your principal, or switch to a fixed-rate mortgage. In all scenarios, you are looking at increased outflows.

What mortgage relief measures might my bank offer if I’m struggling to make payments?

Your bank may offer various relief measures, including extending your amortization term, temporarily waiving fees, or adjusting payment schedules.

These measures are in place to help you manage your mortgage during financial difficulties, but they may increase the overall cost of your mortgage.

Will missing a mortgage payment hurt my credit score?

Yes, missing a mortgage payment can negatively impact your credit score, especially if the payment is more than 30 days late and reported to credit bureaus. However, if your bank agrees to a mortgage relief measure, they may not report missed payments during the relief period.