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Unfortunately, due to her initial hostile reaction, the renewal offer was withdrawn, forcing Agatha to start all over with a new lender.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: