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Wednesday, July 27th, 2016

Skipping a mortgage payment: Pros and cons

When I logged on to check my bank balance the other day, I noticed a message from the bank saying that I have ‘earned’ a one month mortgage payment vacation.

If your bank offers you a chance to skip a mortgage payment it may not work in your favour. SHUTTERSTOCK

The reason for this  break is that I have been paying off my mortgage faster by making increased contributions each month. My goal is to pay off our mortgage in less than 15 years, rather than the usual 25 or 30.  If you do this, most banks will give you the option to skip a mortgage payment once your extra contributions add up to a full months’ mortgage payment.

Taking a break from paying your mortgage can give you some breathing room if you lose your job or decide to stay home with a new baby.  But if you’ve been making extra contributions to your mortgage with the goal of paying it off sooner, skipping a mortgage payment will put you right back where you started.

Here’s how this works:

Skipping a mortgage payment can free-up your cash flow, which can come in handy if you’re planning for a life-changing event like staying home with a new baby, taking a sabbatical from work, or going back to school while working part-time.

Your regular monthly mortgage payment is $1,000 per month.  You want to skip mortgage payments for three months while you’re on parental leave.  Your prepayment goal is $3,000 ($1,000 x three months).

Assuming you have nine months to prepay $3,000, you will need to pay an extra $333 per month.  This means your total monthly mortgage payment over that time will be: $1,000 + $333 = $1,333 per month.

You must accumulate the prepaid amount by taking advantage of the prepayment privileges on your mortgage.

The problem is that skipping a mortgage payment results in interest capitalization.  This means that while you’re taking a break from your payments, interest will be added back onto the outstanding principal on your mortgage.

This also means the bank will adjust the remaining amortization period at renewal so that the mortgage doesn’t exceed the original amortization period.  This may result in an increase to the amount of your regular payments after the renewal.

Rather than paying up front in order to skip payments down the road, why not just set the extra money aside in a high interest savings account each month until you need it?

If your goal is to become mortgage free, skipping mortgage payments isn’t a good idea.

Also Read:

Mortgage life insurance: Why I passed

Is this a good time to refinance your mortgage?

Robb Engen is half of the Boomer & Echo personal finance blogging team with his mother, a former financial advisor.  Reach him at robbengen@gmail.com

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