BROKERS TO BIG BANKS: BEWARE THE 'SKIP-A-PAYMENT' OPTION


by Mark David, MortgageBrokerNews.ca, 5 Dec 2013

Many of Canada’s big banks offer clients the opportunity to skip payments on their mortgages. While this can work to their advantage, mortgage brokers are not big fans of strategy.

One of the main reasons why consumers are drawn to this method is because it does not require any additional fees. Banks have also stepped up their promotion of that option.

'In most cases, there is no fee for this option, and your payments won't change during the term of your mortgage,' explains Mortgage Alliance broker Marcel Greaux.

Although customers find this option convenient, it can create a potentially precarious situation for them in the long term.

'Any skipped interest is added to the principal balance,' Greaux says. 'This is where it gets dangerous, as the increase costs start to compound and ultimately work in favour of the lender, not the borrower.'

Greaux understands the advantage of the skip-a-payment option for homeowners, but believes that brokers should not recommend it to their clients.

'I would say the skip-a-payment option is convenient to have available, but should only be used in an absolute emergency,' he says. 'Skip-a-payment is more like defer-a-payment due to the interest compounding at a later date.

A more prudent measure to access funds may be to make use of a LOC, if available.'

Mel's view: 

Before exercising a 'skip-payment', the borrower should confirm the actual rate charged on the Skip. Is it the contract rate, posted rate at time of the advance, or some other rate declared in the mortgage disclosure statement accompanying the mortgage advance or renewal? It could well be higher than the contract rate.

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