Debt Relief Experts
Canadian homeowners are increasingly struggling to keep up with monthly mortgage payments. Rising interest rates have more than doubled mortgage payments for some homeowners, and the high cost of real estate has led to larger mortgage loans. First-time home buyers may be struggling due to high house prices combined with a low down payment.
Missing mortgage payments in Canada can result in late fees, damage to your credit score and foreclosure. Difficulty meeting mortgage payments often coincides with a maxed-out line of credit or credit cards, which can have a cascading effect on your financial stability.
In this article, we’ll explore what happens if you miss a mortgage payment in Canada and what steps you can take to improve your financial situation.
Table of Contents
Consequences of missed mortgage payments
Here’s what you can expect if you miss a mortgage payment:
Late fees and penalties: Although some mortgage contracts have a 15-day grace period, most lenders typically charge borrowers a late fee as soon as a payment is overdue. While these fees might seem modest—usually ranging from $25 to $50—paying these fees repeatedly can add to your financial burden.
Damage to your credit score: If a mortgage payment is past due for 30 days or more, the late payment can be reported to the credit bureau. Missed mortgage payments can significantly harm your credit score.
Potential loss of your home: Failure to make mortgage payments as agreed upon in your mortgage contract can lead to legal action by your mortgage lender to recover the outstanding mortgage debt. In Canada, there are two primary options to recover a mortgage in default: foreclosure and power of sale:
- Foreclosure: During the foreclosure process, the lender obtains legal title to your property, and any proceeds from the sale go towards repaying the mortgage debt. If the sale proceeds do not cover the outstanding balance, you will still be liable for the remaining amount owing. The lender can keep any excess money if they sell for more that the mortgage balance since they legally own the property.
- Power of Sale: Lenders may seek court permission for a power of sale, allowing them to sell the property without obtaining legal title. Power of sale is a much faster process, and generally, the approach is taken in Canada when mortgage payments are significantly in arrears. Under the power of sale, the lender must show they obtained the best price possible during a sale. Homeowners are personally liable for any deficiency between the mortgage balance and the sale price of the property,
Additional interest charges: Missed mortgage payments mean you are not paying down the principal as fast, which will result in additional interest charges. Until you catch up, this can slow how fast you build home equity.
Difficulty refinancing: Falling behind on mortgage payments can make mortgage refinancing challenging. Similarly, if you want to sell and downsize, porting your mortgage to your new home might be difficult if you are in arrears. Lenders might be reluctant to give you more money if your payment history is not great.
Do missed mortgage payments affect your credit score?
Not all mortgage lenders report mortgage payment history to the credit bureau. Traditional financial institutions, such as banks or credit unions, are more likely to report than monoline lenders (mortgage specialty companies) or private lenders. If your mortgage payment appears on your credit report, it may count toward your credit rating. Equifax and TransUnion have their own specific policies on what counts towards your credit score.
Missed mortgage payments may be more likely to be reported to the credit bureau and certainly will have a negative impact on your credit score. Payment history is one of the most important factors in determining your creditworthiness, typically accounting for about 35% of a credit score.
A lower credit score resulting from missed mortgage payments can make qualifying for new credit cards, loans, or mortgages more challenging. Even if you are approved for credit, you may face higher interest rates and less favourable terms due to the risk associated with your lower credit score.
What happens if you miss one mortgage payment?
Once you are 30 days past due, your mortgage lender may report the late payment to the credit bureau, hurting your credit score.
To catch up, you must make two mortgage payments. Even if you make a payment the following month on time, you are still behind one payment. This is called ‘rolling late’—meaning you are always one payment in arrears. For example, let’s say you missed your May mortgage payment but made your June payment. Your mortgage lender will apply the June payment to your May arrears first, making your June payment late.
Every time you have a rolling late payment, another late payment is reported on your credit report. Even though you are only one payment behind, rolling late payments can have serious consequences for your credit score. You will also incur additional monthly late charges until you make up all your mortgage arrears (including any extra interest and penalties).
How many mortgage payments can you miss before foreclosure?
No mortgage lender wants to foreclose or sell your house under a power of sale unless they have no alternative way to recover their loan.
Usually, your lender will send a collection notice before any legal action is taken.
If you are 90 days or more behind on your mortgage or are habitually in arrears, you can expect your mortgage lender to begin foreclosure proceedings or a power of sale. Most lenders in Canada prefer the power of sale process as it is less costly and involves less court time. A power of sale can begin if you are just 15 days in arrears. From that point, your lender will issue a Notice of Sale, and you will have 30 to 40 days to bring your mortgage current. If you do not pay your mortgage arrears, the court can authorize your lender to seize or sell the property.
A bankruptcy or consumer proposal cannot stop a foreclosure or power of sale process. A mortgage is considered a secured loan, and your mortgage lender has the right to collect against the value of the mortgaged property. Declaring bankruptcy or filing a consumer proposal can deal with any shortfall after the sale of the property.
Strategies to recover from late mortgage payments
If you have fallen behind on your monthly mortgage payments, there are options to keep your home. Here are some strategies worth considering:
Talk with your mortgage lender: Open and transparent communication with your mortgage lender is important when facing financial difficulties. Many lenders are willing to work with homeowners to develop alternative repayment plans. By addressing your situation early and seeking assistance, you may be able to avoid foreclosure and preserve your homeownership.
Short-term mortgage payment deferral: Some lenders offer temporary payment deferral programs, allowing homeowners to pause their mortgage payments for a specified period of time.
Extend your amortization period: Extending the amortization period of your mortgage can reduce your monthly payments, making them more manageable in the short term. Any loan modification that slows payments, either by extending the loan term or temporarily reducing payments, will increase your interest costs in the long run.
Consider refinancing: Mortgage refinancing involves taking out a new mortgage with more favourable terms to replace your current mortgage. This can be an option if your current lender will not agree to modify the terms of your existing mortgage. However, if you are behind on payments and have a poor credit score, your options to refinance may be limited. A mortgage broker may be able to help you find the best mortgage and mortgage rates for your situation.
Consumer proposal: If your mortgage is in arrears due to other consumer credit, like high credit card debt, personal loans or tax debt, filing a consumer proposal can help you eliminate those debts, improving your budget so you can afford your monthly mortgage payments. A consumer proposal is a government debt settlement program that allows you to keep your home and assets while dealing with unsecured debts.
Consider selling your home: If your mortgage is more than you can afford, it may be time to consider selling your home and downsizing or renting for a while.
Can you walk away from a mortgage in Canada?
While walking away from a mortgage should be considered a last resort, it’s essential to understand the process and potential consequences. Here are some key points to consider if you are thinking about handing the keys back to your mortgage lender.
- Legal implications: In Canada, homeowners who walk away from their mortgage may still be liable for any shortfall if the lender sells the property for less than the mortgage, including penalties, legal costs and interest.
- Dealing with a shortfall: A shortfall happens when the value of a property is less than the amount owing on the mortgage. In this case, your mortgage lender has an unsecured claim for the shortfall owing. A consumer proposal can offer debt relief by including any mortgage shortfall from the sale of the property in the proposal.
- Credit impact: Walking away from a mortgage can significantly harm your credit score and may even affect your ability to obtain credit, including a mortgage, in the near future.
If you owe more than your home is worth, talk with a Licensed Insolvency Trustee about options that can help you walk away debt free.
Get A Personalized Debt Free Plan
"*" indicates required fields
How to avoid future missed mortgage payments
Assuming you can restructure and catch up on your mortgage payments, a robust financial safety net is the best defence against future missed payments. Here are some strategies to help you strengthen your finances, so you don’t fall behind on mortgage payments again.
- Build an emergency fund: Try to save at least three to six months of living expenses as a buffer against unexpected financial setbacks like a job loss or illness.
- Create a budget: A disciplined budgeting approach ensures you allocate funds for essential expenses, including your mortgage payment, before discretionary spending. We like a pay-your-bills-first approach to personal budgeting to ensure you pay your bills, including your mortgage, by the due date and avoid late payment fees.
- Conduct a regular financial checkup: Monitor your finances regularly to identify potential early red flags. This proactive approach allows you to address issues before they spiral out of control. For example, if you plan on taking time off due to maternity leave, review your budget and lifestyle well ahead of this life event to ensure you build a payment plan that includes your mortgage payments.
- Diversify your income: Relying solely on a single source of income leaves you vulnerable to income disruptions. Explore opportunities to diversify your income streams to enhance financial resilience.
The bottom line is if you miss one mortgage payment, you don’t need to panic. With some planning and communication, you can avoid any negative consequences to your credit score or a foreclosure.
If other debts, like credit cards or tax debts, are the main reason you are struggling with your mortgage payments, talk with a licensed insolvency trustee about solutions to those debt problems that can help you keep your home.
