Mortgage payments can sometimes be a tricky topic for some homeowners, leading to confusion about when payments are due and what time period they cover.

Recently, we watched two client misunderstandings unfold, highlighting the need for clear, calm communication. Let’s delve into their cases and clarify why mortgage payments are made in arrears, not in advance.

Note to our readers: For client privacy, the names of the subjects in this story have been changed. The values mentioned in this story are accurate and true. The case studies in the article below are presented to educate Canadians regarding mortgage payments and their timing.

Case study 1: Agatha’s private mortgage confusion

Agatha accepted a 1-year private first mortgage on May 31, 2023, providing 12 post-dated cheques from July 1, 2023, to June 1, 2024.

When her lender contacted her in April 2024 about renewing or paying off the mortgage, Agatha was surprised. She believed the maturity date should be July 1, 2024, arguing with her lender that her final payment on June 1st should cover an additional month.

Agatha’s mortgage terms:

• Mortgage terms: Agatha’s registered mortgage document specified a “Balance Due Date” of June 1, 2024, with payments calculated “monthly, not in advance.”
• Payment timing: Mortgage payments are made in arrears, not in advance. This means the payment on June 1 covers the month of May, not the upcoming month of June.

Outcome: Don’t be quick to blame!

Despite the lender explaining this, Agatha was only convinced after consulting her real estate lawyer.

Unfortunately, due to her initial hostile reaction, the renewal offer was withdrawn, forcing Agatha to start all over with a new lender. This misunderstanding on Agatha’s part cost her significant fees and out-of-pocket expenses to refinance this mortgage with a different lender.

Understanding payment timing: arrears vs. advance

Mortgage payments are made in arrears, meaning the payment you make at the beginning of the month is for the previous month’s interest and principal. This is different from many other payment types, which are often made in advance.

Understanding whether payments are due in advance or arrears can be confusing. Here are some examples:

• Mortgages: Payments are typically made in arrears, covering the previous month.
• Car financing: Payments are also made in arrears.
• Car leasing, cell phone contracts, and insurance: Payments are usually made in advance.

Case study 2: Mahi and Amir’s renewal mix-up

Mahi and Amir had a 5-year mortgage renewing on June 1, 2024. They arranged a new mortgage with a different bank, setting the closing date for May 31, 2024.

However, the closing was delayed to June 3, 2024, leading their old bank to collect a full payment on June 1, 2024.

Mahi & Amir’s mortgage terms:

• Payment misunderstanding: Mahi thought the payment on June 1 was for the month of June and expected a refund for most of it. However, like Agatha, she learned the payment on June 1 covered the previous month of May.

Their outcome: Why it pays to keep cool

Similar to Agatha’s case, the payment made on June 1, 2024, covered the mortgage for May, not June. This concept of arrears was initially confusing for Mahi and Amir, but consulting with our team and then their real estate lawyer helped clarify the situation.

After this consultation and reviewing the payout details, Mahi and Amir understood the timing of their mortgage payments and avoided further confusion.

Note: Your mortgage adjustment date (first day when interest will begin to accrue on a home mortgage) is a one-time adjustment on the funding day, which can add to the confusion. Always check with your lender, real estate lawyer, or a licensed mortgage professional if you’re unclear about the terms of your mortgage.

Key takeaways

Always double-check your mortgage documents and confirm with your lender how your payments are structured. Understanding the payment schedule can save you from potential confusion and ensure you’re always prepared for your financial commitments.

Don’t let mortgage payment timing stress you out! Remember, unlike rent, your mortgage is always paying off the past, not pre-paying for the future. Think of it as catching up with your financial responsibilities, not getting ahead of them.

By understanding these details, homeowners can better navigate their mortgage agreements and avoid unnecessary misunderstandings.

If in doubt, always consult with an industry professional to clarify your specific situation. Clear communication and understanding of these terms prevent misunderstandings and  help maintain a smooth relationship with your lender.

This article was written for Canadian Mortgage Trends by:

Payment shocks at renewal due to shorter mortgage terms have become a growing concern for many Canadians. This has led some to question whether adopting longer mortgage terms, similar to those in the United States, would provide greater financial stability.

While Canadian lenders can theoretically provide 15-, 20-, 25-, or even 30-year mortgage terms, market realities and consumer preferences pose substantial challenges.

“The reason we don’t have long term mortgages in Canada is not because they’re illegal, it’s because within the Bank Act… banks are limited on what they can charge for prepayment penalties if you break the mortgage,” Edge Realty Analytics founder Ben Rabidoux explained at a recent conference in Toronto.

“There’s a tremendous amount of interest rate risk embedded in giving someone a 30-year mortgage and then having them break it down the road,” he continued. “So, the banks are like ‘we’re never going to offer 30-year mortgages if we have no way of ensuring that you’re going to stay within that.’”

This issue is particularly pressing as 76% of outstanding mortgages in Canada are expected to come up for renewal by the end of 2026, with the associated payment shocks expected to lead to a rise in mortgage delinquencies.

Assuming no change in interest rates by then, the median payment increase for all mortgage borrowers would be over 30%, while fixed-payment variable-rate borrowers would see their payments rise by over 60%, according to Rabidoux.

Longer terms used to be common

Although 5-year terms are the default option today, Canadians once had a broader range of choices for their payment cycles. In fact, Bruno Valko, VP of national sales for RMG, recalls a time when lenders provided a wider variety of options.

“When I was VP of sales at First Line Mortgages, we had 15-, 18- and a 25-year [fixed-rate terms] available back in the early 2000s, and we sold some, but not many,” he told CMT. “Now, I don’t think lenders have anything more than 10.”

This is in contrast to the mortgage market south of the border, where American homebuyers typically lock in a rate for the entirety of their mortgage term and enjoy an open mortgage that allows them to refinance or pay off the loan early without significant penalties.

“They’re fully open, so who cares? There’s no IRD [interest rate differential] potential,” Valko says, adding that open mortgages are available in Canada, but at a significant rate premium. “You’re going to be paying an astronomical amount of additional interest, so people choose not to do it.”

At the same time, Valko says that as more Canadians find their personal financial stability shaped by the Bank of Canada’s interest rate decisions, many are starting to wonder if there’s a better way forward, one that lets consumers lock in their rates for longer.

“They can do it right now; it’s just that the prices are fairly expensive,” said Peter Routledge, head of the Office of the Superintendent of Financial Institutions (OSFI), at a recent Parliamentary finance committee hearing. “In aggregate, if the product set evolved in that way, that would be a net benefit to the system because it gives mortgagors more choices to manage their personal financial risks.”

Canadian mortgages tied to U.S. rates

The biggest irony in our current system, according to Valko, is that Canadian mortgage rates are much more dependent on the American economy than the domestic market, yet Canadians feel those shocks more acutely.

Fixed mortgage rates are priced based off the Government of Canada’s 5-year bond yield, which has historically been closely tied to the 10-year U.S. Treasury bond, which is itself influenced by U.S. economic indicators like inflation and employment.

“It doesn’t matter what happens in Canada, what matters is what happens in the U.S.,” he says.

“So, if we are so tied to the U.S. in terms of where our mortgages are priced, why do we not have a similar mortgage program?” Valko asks. “It would make sense that our mortgage programs be more aligned with the country that influences our mortgage rates.”

What would happen if Canadians had longer mortgage terms?

Though it’s not financially feasible for most banks today, Valko says a move away from the 5-year term standard would allow Canadians to enjoy greater financial stability, while the Bank of Canada would play a much less significant role in their daily lives.

“The consumer has many advantages, particularly if they don’t want to sell,” he says. “They don’t have any changes in payments and they don’t have the anxiety of a renewal coming up, none of that.”

At the same time, Valko warns that because Canadian household finances are so closely tied to interest rates—through their mortgages and other loan products—the Bank of Canada wields greater influence with monetary policy changes, its primary tool for tackling inflation.

“In the U.S., you could argue that [the Federal Reserve] has to go much higher [when raising interest rates] because the impact is much less; it doesn’t impact a lot of their mortgages,” he says, adding that is why Canada has been able to start lowering its interest rates earlier than its southern neighbour.

The most obvious argument in favour of keeping things as they are, however, was perhaps the 2007-08 Financial Crisis.

“We were one of the best in the world in terms of being able to weather the subprime mortgage crisis,” Valko says. “Our system was strong, our system was able to weather that, and other countries weren’t as strong.”

OSFI’s Routledge made a similar observation during his Parliamentary finance committee apearance, saying many of his central bank peers around the world are “envious of the track record of credit quality in our mortgage system.”

“Every country’s mortgage system is a reflection of its history and its regulatory policy. I would start by saying Canada’s mortgage system has worked quite well,” he said.

Why longer-term rates may soon have more appeal to Canadians

While the Bank Act keeps longer-term mortgage options at a higher price point, there is a chance that Canadians will be willing to pay that premium to lock in rates for longer, given recent interest rate fluctuations.

In fact, Valko says he’s seen it happen once before, when the high interest rates of the late 1990s plummeted during the dot-com crash of early 2001.

“People back then saw 7.25% [mortgage rates on a 5-year term] for such a long time, and then when 10-year terms were offered at, let’s say, 5%, people said, ‘Wow, that’s way lower than the seven and a quarter 5-year term that was available last year,’” he says. “If people are looking at 5% mortgage rates now, and let’s say [once rates drop further] the 10-year is offered at four and a quarter, I think people would be inclined to take it.”

Currently less than 5% of Canadian mortgage borrowers have a 10-year term due to the higher interest rates associated with longer terms and the high likelihood of breaking the mortgage early, which would result in substantial prepayment penalties.

As Rabidoux alluded to earlier, these penalties, especially if the mortgage is broken within the first five years, can be particularly severe.

However, he does think Canada will eventually move to adopt longer terms similar to those available in the U.S.

“It’s a good idea,” he said. “I think it’s probably coming, but it’s probably at least a few years out.”

This article was writtenf or Canadian Mortgage Trends by: