What Is a Skip-Payment Mortgage?
A skip-payment mortgage is a product that allows a borrower to skip one or more payments without any penalty. The interest accrued during the skipped periods will instead be added to the principal and monthly payments will then be recalculated once they resume.
Skip-payment mortgages are most common outside of the United States, especially in Canada and some Asian countries.
- A skip-payment mortgage grants borrowers a grace period for nonpayment without penalties or charges.
- The interest and principal due that was skipped is amortized into future mortgage payments, which increases the monthly payments going forward by a modest amount.
- While uncommon in the U.S., skip-payment mortgages are found in countries like Canada and the Philippines to help provide some relief to homeowners.
- U.S. borrowers should be wary of misleading marketing tactics that advertise skip-payment grace periods, but in fact do not.
Understanding Skip-Payment Mortgages
A skip-payment mortgage program is designed to provide relief to borrowers who experience a temporary hardship such as illness or injury. Each Canadian bank offers its own program; but in general, the programs allow the equivalent of one month of skipped payments per year. Borrowers must have a strong credit score to qualify for a skip-payment mortgage and they must otherwise be up to date on their mortgage payments. Borrowers should be aware that they will still owe the interest and principal that they would have paid in that month. In fact, the election to skip a payment adds to the interest cost over the life of the loan. The interest is rolled into future payments and the principle remains unchanged since no monthly payment was made. The borrower is also responsible for covering insurance and property tax during the skip period. The upside of the skip-payment offer is that the borrower can miss a payment without any damage to their credit score.
Some Canadian banks even offer an extended skip-payment program which allows the borrower to skip up to four consecutive months of mortgage payments. The banks caution consumers that taking advantage of such an offer will significantly add to the interest costs of a loan.
Misleading Skip-Payment Offers in the U.S.
U.S. consumers often receive marketing materials from lenders offering the chance to skip one or two months’ mortgage payments. Borrowers should treat these offers with extreme prejudice, as they tend to actually be advertisements for refinancing programs. As part of the refinance settlement process, borrowers will often go for a month or two without making a monthly payment. This gap in payments can lead to a false impression that refinancing lets the borrower off the hook for a monthly payment or two. The borrower will still be responsible for making those payments; in many cases, these payments are lumped into closing costs.
Some U.S. financial institutions do offer skip-payment plans on car, boat, or credit card loans, but caveats similar to those of the Canadian programs apply. Borrowers will still have the principal balance to pay, and will likely add to the interest costs of the loan by choosing to skip a payment.