Missed A Mortgage Payment? Your Next Steps…

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Amid a series of interest rate hikes implemented by the Bank of Canada over the last few months, some Canadian homeowners may be concerned about whether they’ll be able to keep up with their mortgage payments.

Missed mortgage payments are not common in Canada, according to data compiled by the CMHC. In Q1 of 2022, the country’s mortgage delinquency rate was 0.18%, down from 0.38% in 2012.

Still, for those who may be likely to miss an upcoming mortgage payment, or are already past their due date, there are steps that can be taken to mitigate the situation.

Be proactive and transparent by letting mortgage lenders know about the possibility of missing an upcoming payment.

It has been advised that it’s easier to ask for permission (to miss a payment) than it is to ask for forgiveness in this case.

While homeowners may be expected to pay a penalty for missed mortgage payments, lenders will usually try to cooperate with borrowers to find a solution, says an expert. Banks prefer to help you with staying up to date than having ownership of the homes themselves.

Once the due date for a mortgage payment has passed, lenders will often contact homeowners via mail, phone or through their online portal to notify them of the missed payment. At that point, homeowners should call their lenders right away to discuss next steps. Different lenders have different programs that may be able to help clients manage their mortgage payments.

The whole objective is to delay the payment and find a solution.

Short or long-term issue?

2. Determine whether the reason for missing a mortgage payment stems from a short-term issue, or one that will affect a person’s income for the unforeseeable future, such as losing a job. Missing a mortgage payment is often result of cash flow issues, and where net household income is not enough to cover monthly expenses, including mortgage payments.

If the problem is short term, explore the idea of a mortgage deferral? Payments are delayed for a specific period of time. Some banks also offer mortgage payment vacation programs, which allow borrowers to make larger payments in advance or pay a little more each month in order to take time off from paying their mortgage in the future. This can be helpful for those who suspect it may be difficult to make their mortgage payments in the months to come.

3. Putting off other payments if it means being able to meet your monthly mortgage obligations.

“What you should be doing is missing every [other loan payment] first,” said an expert. “Your least risky thing is to skip your next visa payment if that will help you get current on your mortgage payment.”

If the problem is one that will affect mortgage payments in the long term, perhaps extending the mortgage’s amortization rate is the best option. This would give homeowners the ability to make lower mortgage payments across more time. Banks can also allow borrowers to restructure or consolidate their debt payments using a single loan, which can help relieve some of the stress around remembering to make large payments each month.

“There’s the potential to … consolidate all of your debt together into one payment every month rather than paying all these different payment amounts that are potentially going to be at higher interest rates,” Zlatkin said.

If missed mortgage payments are a recurring issue, lenders can take legal action, Terrio said. This may result in foreclosure or power of sale, both of which involve losing ownership over a home. Speaking to an expert about managing mortgage payments in advance can help homeowners explore their options and avoid losing their home, Zlatkin said.

“If you let it go, it’s like an untreated wound – it festers and it becomes worse,” she said.

“It’s a lot easier to prevent bad moves being made if someone can advise you on what those bad moves might be, than it is to undo them,” Terrio said.

Will it affect the credit score?

Lenders will keep their own records of missed payments and often report them to credit bureaus, such as TransUnion Canada and Equifax Canada. As a result, missing a mortgage payment will have a negative impact on a person’s credit score.

“Your credit rating is like a financial passport, so when [lenders] see that number, it indicates how reliable you are,” an expert told CTVNews.ca in a telephone interview recently. “Your credit score could really take a hit if there were multiple [late payments].”

Records of missed payments will remain on a person’s credit report for seven years. While it is possible for someone to improve their credit score over time, even one missed mortgage payment can lower their credit worthiness. As a result, lenders may not be able to offer as good an interest rate.

“If somebody thinks that you may not pay them back, they’re going to charge you a little bit more interest in order to hedge their bet against the fact that you may default later on,” she said.

Adding pressure to cash flows of many Canadian households are rising interest and inflation rates, Terrio said. He noted his company has seen an increase in the number of new clients expressing such concerns.

“Your income may be the same, but if everything’s costing more, then you could miss a mortgage payment,” said Terrio. “Inflation is enough to derail the ability to pay a mortgage.”

Based on a recent survey conducted by Manulife Bank, nearly one in four homeowners said they may not be able to afford their home if interest rates continue to increase.

For those concerned about meeting their monthly payment requirements, Moss recommends assessing their total debt-to-income ratio — the percentage of gross monthly income that goes towards paying monthly debt. This can be done by adding up debt payments such as mortgage payments, credit card bills and any other loan payments made each month.

Then, divide this number by the total amount of money earned each month before taxes and other deductions, and multiply by 100. A 50 per cent debt-to-income ratio should be considered the absolute maximum, Moss said.

“Generally, if [that percentage] is above 50, there’s got to be some sort of corrective action,” said Moss.

At that point, he suggests looking at options to restructure debt payments, and making adjustments to spending to reduce the ratio.