Lenders are advertising the option of skipping a mortgage payment more often these days – with one major bank even creating a TV ad!
But unless this is your only option, it’s not recommended that you skip a payment because, like most ads that sounds too good to be true, this option is as well.
The banks want you to think they’re advertising the option to skip a payment to do you a favour. But it’s important to realize that lenders are in the business of making money.
They’re not going to create an ad that doesn’t benefit them in the long run.
And it’s not like you can simply choose to skip any payment at will when you need it most. You actually have to prepay your mortgage in order to take advantage of this mortgage vacation option.
You can miss a regular mortgage payment as long as you have already prepaid that amount by doubling up any mortgage payment, increasing your mortgage payments or making lump sum payments.
It’s important to know how much you can prepay each year before making extra payments – this varies from lender to lender.
And if you’re going through the trouble of prepaying your mortgage, you want to make the savings work to your advantage by actually paying your mortgage off quicker – not diminishing those savings by taking a mortgage vacation.
The number of eligible payments covered by your payment vacation will be based on a combination of your prepaid amount and your current regular monthly mortgage payment.
There is also typically a maximum payment vacation permitted per mortgage term, regardless of how much you have prepaid your mortgage.
Other considerations to think about when looking at the mortgage vacation option include:
interest is capitalized (i.e. interest is added to your outstanding principal balance).
Borrowers lose the benefit and interest cost savings of prepaying their mortgage once they use the mortgage vacation option.
If you happen to already be in arrears on your mortgage, you can’t take advantage of this option.
It’s always important to read the fine print and ask questions when using a tool advertised by your lender.
Better yet, speak to your mortgage professional – we know the ins and outs of all the bank offerings and can help advise you on your best options.
As independent, unbiased mortgage professionals, it’s our job to show transparency to ensure you have the right security, product, term and rate for your mortgage needs at the lowest overall cost and with the most control in homeownership for the security you deserve.
Jean-Guy Turcotte is an Accredited Mortgage Professional with Dominion Lending Centres in Red Deer.