With interest rates on the rise, homeowners with variable-rate mortgages (or fixed-rate mortgages nearing the end of their term) may be susceptible to jarring monthly payment increases.
Though the mortgage stress test is a hedge against such scenarios, one in five Canadians (20%) say they’re concerned about not being able to make mortgage or rent payments if Canada enters a recession, according to a September 2022 NerdWallet survey conducted online by The Harris Poll among 1,116 Canadians.
It’s a worry affecting Canadians across age groups; 25% of Millenials (ages 26-41), 27% of Gen X (ages 42-57) and 14% of Baby Boomers (ages 58-76) saying they’d be concerned about not being able to make mortgage or rent payments if Canada enters a recession.
Missed mortgage payments can happen, whether by mistake or because you’re having trouble coming up with the money. Regardless of the cause, the sooner you address the situation, the better.
What happens if you miss a mortgage payment?
While mortgage lenders can take legal action after the 15-day grace period, that rarely happens. Instead, the sequence of events tends to progress through the following steps.
You’ll pay late fees
Your mortgage contract will state the late fees and terms applicable to your mortgage. Fees tend to range from $25 to $50, and can be charged as soon as the payment is missed.
Your credit score might drop
After 30 days, your missed payment will be reported to the credit bureaus. Each credit reporting bureau (Equifax and TransUnion) has its own way of calculating your score, but a history of on-time payments (or not) plays a big part. The more overdue your payment is, the more detrimental the effect will be on your score.
Even after you make up for the missed payment, once it has been reported to the bureaus, a late payment stays on your credit report for up to seven years.
You might go into default
If you haven’t made a payment by 30 days after your due date, your mortgage will go into default. This is a serious situation that can seriously hurt your credit score and lead to foreclosure.
You could lose your house
A mortgage is a loan against which your home is used as collateral. When a lender doesn’t get their payments as per the terms of the mortgage contract, they can legally take back the home and sell it to recoup their losses. This is known as foreclosure.
The foreclosure process varies by province. In British Columbia, Alberta, Saskatchewan, Manitoba, Quebec and Nova Scotia, it is known as judicial sale or judicial foreclosure. It’s a lengthy process that goes through the court system over the course of up to six months, and results in the title of the house being transferred to the lender, who then keeps all the proceeds from the sale.
Power of sale
Newfoundland, New Brunswick, Prince Edward Island and Ontario use the power of sale process rather than the foreclosure process.
Power of sale begins with a notice sent by the lender that gives you 35 days to catch up on missed payments. As long as you get back on track, the process stops, although you’ll still be on the hook for associated fees and your credit score will take a hit.
If you don’t rectify the situation within the 35-day period, the transfer of ownership to the lender through power of sale begins. Power of sale doesn’t go through the court system, and it happens significantly faster than judicial foreclosure.
How late can a payment be before it’s ‘missed’?
Most Canadian lenders will give you a 15-day grace period before your mortgage payment is considered to be missed. This grace period means your payment isn’t missed until it’s 15 days late — and you typically won’t be on the hook for late fees until after this time.
If you haven’t made a payment by 30 days after your due date, the lender will report the missed payment to the credit bureaus. This is when the consequences start increasing in severity.
What is a “rolling late”?
Missing a mortgage payment and skipping a payment are separate matters. If you miss a mortgage payment one month, then resume paying the next month (effectively skipping the missed payment), you’re not back on schedule. The next payment is considered a late installment of the originally missed payment.
Until you double up on your mortgage payments to make up for the missed payment, you’re in a “rolling late” situation where every subsequent payment is considered late. This means you’ll be charged late fees every month, and it can have a big effect on your credit rating.
The way to avoid a rolling late predicament is to make up for the missed payment as soon as possible, then resume your regular payment schedule.
How many mortgage payments can you miss before foreclosure in Canada?
Foreclosure is a long and expensive process, so it’s not triggered immediately upon missing a mortgage payment. Once you stop making payments, you’ll likely get letters from your lender after 30, 60 and 90 days. If you haven’t responded to these letters after 90 days, then foreclosure proceedings will begin.
Think you’ll miss a mortgage payment?
The more proactive you are, the better. If you think you’re about to miss a payment, contact your lender right away. They’re more likely to strike a deal and lessen the consequences of a missed payment if you let them know beforehand rather than waiting until after you miss the payment.
Make a payment ASAP
Depending on the circumstances, the lender may allow you to make a late payment (with or without a fee). If your situation is more serious, they may help you design a repayment plan, adjust the mortgage (such as by extending the amortization), get a second mortgage, or even arrange for a deferral.
What to do if you’ve already missed a mortgage payment
Again, the sooner you open the lines of communication with your lender, the more options you’ll have to work with them so you can continue to afford the mortgage and keep your home.
If your financial situation has changed dramatically and you don’t think you’ll be able to afford your mortgage payments going forward, you may want to consult a lawyer or mortgage broker for advice. Foreclosure and bankruptcy are worst-case scenarios with long-term consequences for your credit, so if you’re in danger of foreclosing, you may want to consider selling instead.
This survey was conducted online by The Harris Poll on behalf of NerdWallet from September 6-7, 2022 among 1,116 Canadian adults ages 18 and older. The sampling precision of Harris online polls is measured by using a Bayesian credible interval. For this study, the sample data is accurate to within +/- 2.8 percentage points using a 95% confidence level. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Marcelo Vilela at [email protected]