The cost of borrowing has substantially increased over the past year, and many homeowners are concerned about missing their mortgage payments in the time to come. According to the Canadian Social Survey on Quality of Life and Cost of Living conducted in the fall of 2022, 44% of the participants expressed concerns over their household being able to afford housing or rent. Some homeowners who bought their homes at a variable interest rate during the pandemic are already feeling the heat of increased mortgage rates, and the high inflation has amplified the financial pressure on average Canadians.
Missing a mortgage payment can have a detrimental effect on your credit score, and if you continue missing your mortgage payments, you may even lose your house. Read below to find out what you should do if you are going to miss a payment or have already missed a payment.
Most lenders in Canada give a grace period of 15 days, which means that the payment is not considered missed if you pay up within this time. After the 15-day period, the lender can take legal action against you. However, in most cases, lenders don’t take legal action until about 90 days from the date of a missed payment.
You may be charged late fees
Mortgage contracts include terms for late payments and outline the fees you would need to pay in the event of a late mortgage payment. The amount varies depending on your lender but is generally in the range of $25 to $50. Lenders usually give you a grace period of 15 days, after which the payment would be considered missed. If you make the payment within this period, you typically won’t be charged a late fee. However, you should not make this a habit and make your monthly payments on time to avoid unfavourable consequences.
Your credit score might be hurt
Lenders usually report missed payments to credit bureaus after 30 days of the payment due date. Late and missed payments have a negative effect on your credit score, and your credit score is likely to take a hit in such a situation. Credit bureaus (TransUnion and Equifax) calculate your credit score on several factors, and your payment history plays an important part in determining your score. If you continue to miss your mortgage payments, it can have a disastrous impact on your credit score. Your credit score determines your creditworthiness, and therefore it is extremely important to make timely payments and maintain a healthy credit score.
You could go into default
Mortgage default occurs when the borrower breaks any term of the mortgage contract, such as when they stop making monthly payments. Your mortgage will go into default when you don’t make a payment for 30 days after the payment due date. When this happens, your home could go into foreclosure, and you could end up losing your home.
You might lose your house
Your mortgage is a loan secured by the home as collateral. When you fail to make the mortgage payments, your lender can legally take your home and recover the mortgage amount by selling it. Depending on the province, the lender can carry out the process of foreclosure or power of sale. The commonly used term used to describe this process is foreclosure.
In Ontario, Prince Edward Island, New Brunswick, and Newfoundland and Labrador, the process of the power of sale applies. Power of sale means that the lender has the power to sell your property. Typically the lender will give you written notice. You have the opportunity to stop the process by bringing your mortgage back into good standing or to pay it off during the notice period. You will still have to pay the late fees. The notice period varies depending on the province. In this process, the money left over from the sale after the mortgage and fees are paid off goes to the homeowner. At the same time, if the sale does not recover the mortgage and selling fees, the homeowner will have to pay the shortfall.
In Quebec, British Columbia, Alberta, Manitoba, Saskatchewan, Nova Scotia, and the 3 territories, the process of foreclosure is carried out instead. This is a lengthier process than the power of sale. The lender needs to go to the civil court and get a foreclosure order that transfers the title and right of the home to the lender. The lender can now sell the home and keep the profit or bear the loss of the sale.
It is ideal to avoid missing your mortgage payments by finding ways to pay up. It is recommended to have an emergency fund to deal with financial issues when you lose your job or run into a problem. Alternatively, you could consider cutting down on expenditure to try and make your mortgage payment in time. If these options don’t work and you still find yourself unable to make a payment, you should take the steps mentioned below.
If you think you are likely to miss an upcoming mortgage payment, you should be proactive and get in touch with your lender at the earliest. Most lenders will work with you and offer you a solution or a deal. They may also reduce or forgive your late payment penalty if you are going to pay up soon or offer you a solution depending on your situation. Lenders are more likely to cooperate and compromise before you have defaulted rather than after you have missed a payment.
You must also determine if your problem is temporary or if you are likely to miss payments going forward as well. You should discuss the situation with your lender so that they can offer you an appropriate solution. For a short-term issue, the lender may offer you a solution, such as a mortgage deferral, allowing you to defer the payments for a specific amount of time. For a long-term issue, the lender may offer you a solution, such as extending your amortization period, which would allow you to make smaller payments for a longer duration of time. Some other solutions include interest-only payments, mortgage capitalization, second mortgages, mortgage refinancing, and more.
If you have already missed a payment, you still have options to get back on track. You could do the following when you miss a payment.
If you missed your payment and did not contact your lender yet, you should do that at the earliest. If you don’t do that, the lender will definitely contact you. You should not avoid talking to the lender and rather work with them to find a solution. The lender will want to discuss the issue and offer you repayment options. Foreclosure is usually the last option for lenders, and most lenders will offer you multiple options before going for foreclosure.
If you miss a payment and make a payment as usual in the following month, the payment will be considered a late payment for the previous month. This payment will not be considered an on-time payment, and you will be charged a late fee for this payment. Every payment you make after this will be considered a late payment for the month before, and you will be charged a late payment fee each month. This is known as rolling late. You could avoid this situation by making a double payment or talking to your lender. The lender might let you defer or skip one payment and continue your payments from the following month.
If you think you will not be able to pay your monthly payments going forward due to a sudden change in your financial situation, you should take advice from a lawyer or mortgage broker. It may be better to sell your home rather than go into foreclosure or bankruptcy, as they can severely damage your credit score. It could take you several years to rebuild your credit in such a situation.
In Canada, most lenders give the borrower a grace period of 15 days before being considered as missed. If you make the payment within the grace period, you are not charged the late payment fee. If you don’t make any payment within 30 days of the payment due date, the lender will report a missed payment to credit bureaus. The missed payment will appear on your credit report and negatively impact your credit score.
Most lenders will give you an opportunity to get your payments on track before proceeding to foreclosure. Most lenders do not proceed to take any legal action for about 90 days from the date of your first missed payment. Instead, they will send you reminder letters for the first few months. If you keep missing your payments continuously and violate the terms of the mortgage contract, the lender will proceed with the foreclosure process after 90 days have passed.
To maintain your mortgage in good standing, you must make your mortgage payments on time. However, if you are unable to make a payment and are afraid you will miss the payment, you should contact your lender at the earliest and discuss your options. If you keep failing to make payments, there can be serious consequences, and you may also end up losing your home. Additionally, your credit score can be majorly impacted, and you could spend years rebuilding your credit.