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A skip-payment mortgage is a type of loan for the purchase of a house with terms that allow the borrower to skip a loan payment without going into default. The loan terms specify how many payments the borrower can skip, how often he can avail himself of this option and under what conditions. Although the lender allows the borrower to skip a loan payment, the interest on the loan continues to accrue. It is added to the principal balance of the loan, and the payment schedule is recalculated to account for the change in the outstanding loan balance.
The way the home mortgage industry operates in a particular country tends to be a reflection of public policy. In some countries, the mortgage industry is only lightly regulated. Lenders have the freedom to craft loan products that suit their own interests, and are not obligated to add consumer-friendly options. In other countries, the government has set standards that protect homeowners against default and predatory lending practices. Mortgage lenders in these countries are more likely to design loan products that are sensitive to consumer needs.
In certain countries, like Canada, the mortgage industry has designed a loan product that gives the borrower some flexibility if he has a major life issue that impacts his ability to pay the loan on a monthly basis. The skip-payment mortgage allows the borrower to skip as many as four payments. The number of payments that can be skipped and the circumstances that can trigger the option vary by lender. Some lenders only allow the borrower to skip one payment. Others let the borrower initiate the skip at his own discretion, while certain lenders require proof of a qualifying event, such as a death in the family, sickness or job loss.
Regardless of how the lender structures the right to skip a payment, skipping the payment does not mean that the payment has been waived. On the contrary, a skip-payment mortgage continues to charge the borrower interest over the period of time that no payment is made. Interest for that time period is added to the principal balance of the loan, increasing the total amount that the borrower owes. The lender then recalculates the borrower's monthly payment or payment schedule to add in this additional amount.
This process of increasing the principal balance of a loan with excess interest owed from an insufficient or missed loan payment is called negative amortization. Although a skip-payment mortgage can be a benefit in times of emergency, the impact of skipping payments on the total amount owed must also be taken into account. A borrower can end up paying interest on the interest that has been added to the principal balance, significantly impacting the borrower's balance owed and the equity in the property.
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