This article has been updated from a previous version.
Mortgage payments are a regular commitment for homeowners, but did you know you might have the option to pause your payments temporarily?
This is known as a mortgage vacation. It allows you to suspend payments for a few months, often after you make prepayments on your mortgage.
While the idea of taking a break from mortgage payments sounds like a great idea, there’s a catch. A pause on your payments doesn’t stop interest from accruing, and that interest will be added to the mortgage principal. As a result, in the long run, this can significantly increase the total amount you owe. Let's break it down.
How do mortgage vacations work?
Most mortgages allow you to make a prepayment on top of the regular mortgage payment. If you make a prepayment, your financial institution may offer you a mortgage vacation. You may choose to take this type of vacation if you plan on going back to school, taking parental leave or taking a sabbatical, etc.
Example scenario
Suppose you have a $500,000 mortgage with a 5-year fixed interest rate of 4.29%. Your monthly payment is approximately $2,706 on a 25-year amortization.
If you prepay $10,824 ($2,706 x 4), you might qualify for a four-month mortgage vacation. However, during that time, interest will accrue.
At a monthly interest cost of around $1,787.50, skipping four payments would add roughly $7,150 to your mortgage balance, bringing your debt to approximately $507,150 (excluding compounding effects).
It’s also worth noting that while you won’t pay your mortgage principal during this time, other related payments, like mortgage life insurance, critical illness insurance, or municipal taxes, may still need to be made separately.
Related: Why do mortgage rates change in Canada?
Mortgage prepayments and penalties
Before deciding whether to take a mortgage vacation, you need to find out how much of a prepayment you’re allowed to make.
Most financial institutions allow you to make a lump-sum prepayment of between 10% and 20% of the original principal amount every year without having to pay a penalty.
Another prepayment option that may be available to you is called a double-up payment, which is twice as much as your regular mortgage payment. If your usual payment is $1,899 a month, a double-up payment would be $3,798.
In both cases, your prepayment goes directly towards your principal. But first, make sure you’re allowed to make one of these types of prepayments, or you may incur a penalty.
Read more: Beware as mortgage rates drop, the pre-penalties don’t
Comparing mortgage vacations vs. Mortgage deferrals
Mortgage payment deferrals became a vital lifeline for millions of Canadians during financial crises, such as the COVID-19 pandemic, when job losses and reduced work hours brought on unprecedented hardships.
In January of this year, Canada's unemployment rate stands at 6.6%, reflecting a slight decline from the previous months but still higher than the 6.1% rate recorded a year earlier.
Although the unemployment rate in Canada has since stabilized, current economic pressures like rising living costs and interest rates mean that deferral options remain a relevant consideration for many homeowners in 2025.
During the earlier stages of the pandemic, instead of potentially facing a wave of mortgage defaults, financial institutions allowed affected homeowners to defer their payments for up to six months.
According to the Canadian Bankers Association by June 30, 2020, 13 member banks have allowed 760,000 Canadians to defer their mortgage or skip a payment with approval rates nearing 90%.
Today, many banks continue to offer deferral programs during periods of economic instability or financial emergencies, though strict eligibility requirements often apply.
Learn more: Deferring your mortgage could cost you more down the road
How deferrals differ from mortgage vacations
A mortgage payment deferral is slightly different than a mortgage vacation. With a deferral, you aren’t required to make any prepayments ahead of time. But like a mortgage vacation, deferred payments mean that interest will continue to accumulate on the principal balance. This can significantly increase your total debt over time.
Using our example above, if you have a $500,000 mortgage with a 5-year fixed rate of 4.29%, your interest costs per month during a deferral would be approximately $1,787.50. Over six months, interest alone could total approximately $10,725, which would be added to your principal balance.
“When your payments start again, your mortgage payment might be based off the total amount you then owe to pay off your mortgage in accordance with the original payment schedule,” notes the Canada Mortgage and Housing Corporation.
As a result, you should check with your financial institution to find out if there will be any changes to the amount you pay.
Related: Can you negotiate your mortgage?
Skipping a payment
Skipping a mortgage payment is another option offered by financial institutions. This feature, available under certain conditions, allows you to temporarily pause one or more payments without defaulting on your mortgage obligations. Unlike deferrals or vacations, skipping payments is typically utilized for very short-term financial relief.
For instance, banks like TD, BMO and RBC make skipping payments easy through their mortgage products.
TD, for example, offers options to skip one monthly payment, up to two consecutive biweekly payments, or as many as four consecutive weekly payments once per year, provided you meet the eligibility requirements. However, skipped payments follow the same principle as deferral or vacation options—interest accrues and adds to your principal balance.
Related: Reverse mortgages or downsize: What to consider
Should you take a mortgage vacation?
The best choice depends on your financial situation and long-term goals.
Mortgage vacations are often better for planned life events, such as going back to school, while deferrals are more suited for unexpected financial crises. Skipping payments, on the other hand, serves as a quick-fix solution for short-term cash flow issues.
Even if you decide to take a mortgage vacation, you still need permission from your lender. TD notes that “you must first make at least one regular mortgage payment and give us reasonable notice.”
Instead of taking a mortgage vacation, it’s better to set up an emergency fund. That money can be held in a high-interest savings account or a tax-free savings account (TFSA). With either of these options, you’ll earn interest rather than pay interest.
Regardless of your choice, it’s critical to calculate the additional costs of accrued interest and factor in how this will affect your overall repayment plan. Consulting your lender or a mortgage broker can help you determine the best solution while minimizing financial strain.
Read next: What is a mortgage extension, and should you get one?
Compare Mortgage Rates
Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.
