What is a skipped payment mortgage?
A deferred payment mortgage is a home loan product that allows a borrower to skip one or more payments without any penalty. Interest accrued during skipped periods will instead be added to the principal, and monthly payments will then be recalculated once they resume.
Deferred payment mortgages are most common outside the United States, especially in Canada and some Asian countries.
Key points to remember
- A deferred payment mortgage gives borrowers a grace period in case of non-payment without penalties or fees.
- Interest and principal owed that have been skipped are amortized into future mortgage payments, increasing monthly payments in the future by a modest amount.
- Although rare in the United States, deferred payment mortgages are found in countries like Canada and the Philippines to help relieve homeowners.
- US borrowers should beware of deceptive marketing tactics that advertise grace periods without payment, but in fact this is not the case.
Understanding Deferred Payment Mortgages
A deferred payment mortgage program is designed to provide relief to borrowers who experience temporary difficulties such as illness or injury. Each Canadian bank offers its own program, but generally the programs allow the equivalent of one month of skipped payments per year.
Borrowers must have a strong credit rating to qualify for a deferred payment mortgage and they must otherwise be current on their mortgage payments. Borrowers should be aware that they will still owe the interest and principal they would have paid that month. In fact, choosing to skip a payment increases the cost of interest over the life of the loan. Interest is carried over to future payments and the principle remains unchanged since no monthly payment has been made.
The borrower is also responsible for covering insurance and property tax during the jump period. The benefit of the skip payment offer is that the borrower can miss a payment without hurting their credit rating.
Some Canadian banks even offer an extended skip payment program that allows the borrower to skip up to four consecutive months of mortgage payments. Banks warn consumers that taking advantage of such an offer will significantly increase the interest costs of a loan.
Misleading US Payment Skip Offers
American consumers often receive marketing materials from lenders offering the option of skipping a month or two of mortgage payments. Borrowers should treat these offers with extreme prejudice, as they tend to be advertisements for refinancing programs. As part of the refinance settlement process, borrowers will often go a month or two without making a monthly payment.
This gap in payments can give the false impression that refinancing allows the borrower to get off the hook for a monthly payment or two. The borrower will still be responsible for making these payments; in many cases, these payments are lumped into closing costs.
Some US financial institutions offer deferred payment plans for car, boat or credit card loans, but similar caveats as Canadian programs apply. Borrowers will still have the principal balance to pay and will likely increase loan interest costs by choosing to skip a payment.