When you take out a mortgage, you're basically making a promise to the lender that you'll make every payment on time and in full at each billing period. Whether you make monthly, semi-monthly, accelerated bi-weekly or weekly mortgage payments, every scheduled payment must be made. If not, you could face some serious consequences.
But what exactly would happen if you miss a payment or two?
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That all depends on whether or not you end up making up for that missed payment, and how much time elapsed between the payment due date and when the payment was actually made. But if you miss a payment altogether and never end up paying it at all, the repercussions will be more severe.
The thing is, many homeowners might find themselves in a situation where they either don't have the funds to make a mortgage payment one month or simply forget to make a payment. Unfortunately, such an oversight could have a negative impact on your finances and credit score.
One Missed Payment Could Cause A Ripple Effect
If you miss a mortgage payment, you'll need to make up for it at some point. That missed payment isn't just going to be added to your principal loan amount. You can't just carry on with the remainder of your payments as they're scheduled and forget about that one payment that you missed.
If you miss just one mortgage payment, the following month's mortgage payment will then be considered late. Why? Because that next payment will be considered the missed payment that you're making up for, which means you'll be playing catch-up.
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And if you fail to make that extra payment to make up for the one you missed, you'll be considered late with every monthly payment going forward.
While one missed payment might come with smaller consequences, missing payments consistently over time can land you in a dire situation where you're deemed to be late with every subsequent payment.
Late Fees Are Applicable
Late payments are typically charged a late fee. And while one late payment fee might not be horrible, multiple late fees can really add up and put you further in debt. If every subsequent payment you make is considered late, you'll constantly be dishing out additional funds to cover these penalty fees.
Let's say you missed your mortgage payment on April 1st. The payment that you make on May 1st will be considered the make-up payment for the missed payment the month before and won't be considered your payment for May 1st. Every payment made going forward will be considered late until you make up for that original missed payment.
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For the majority of mortgages in Canada, you'll have a 15-day grace period, which means your lender probably won't charge you a late fee until after the 15 days have elapsed. The actual late fee that you would be charged depends on your lender and will be detailed in your mortgage contract.
Your Credit Score Will Suffer
Lenders can report a late payment that is at least 30 days past its due date to the credit bureaus. So, if you missed your April 1st payment, it will be considered late by May 1st, as you have a full 30 days after the payment due date before the credit bureaus will be alerted to your late payment.
Once the credit bureaus catch wind of missed payments and your credit report is noted, your credit score could suffer. The number of points that will be shaved off your score will depend on your credit history and the scoring system that your lender uses.
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And the longer the payment is late, the worse it will be for your credit score. A 30-late payment is bad enough, but a payment that’s over 90 days late is much worse.
Of all the factors that contribute to the calculation of your credit score, your payment history is the most important. More specifically, 35 per cent of your credit score is based on your history of payments, including your mortgage payments.
If you had a really good credit score before you missed a mortgage payment, the effects might not be as serious. But if your score is already suffering, any additional points deducted from your credit score could prove to be detrimental to your ability to secure future loans or credit lines.
But if you fall behind on more than one payment, your credit score could take a bigger hit as opposed to missing just one payment. That's why it's so important to make up for that missed payment as soon as possible in order to avoid getting stuck in a perpetual state of late payments, despite continuing to make a payment every month.
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If you make up for that missed payment some point soon and avoid the chain of missed payments, as described above, your credit score shouldn't take much of a hit. If the rest of your credit history and payment behaviour is healthy, the credit bureaus will chalk up your one missed payment as an exception and your credit score should be able to climb back up to where it was before.
Keep Up With Your Mortgage Payments
To avoid paying late fees or damaging your credit score, be sure to keep up with your mortgage payments. Set reminders for yourself or have your mortgage payments automatically deducted from your bank account. If you do miss a payment, make sure to make up for it right away in order to avoid late fees or any negative impact on your credit score.
