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Arrears
Arrears refers to a loan or mortgage payment that a borrower has missed and not yet paid by its scheduled due date. In Canada, a mortgage is in arrears as soon as any required payment remains unpaid, even if the borrower only misses a single payment.
Arrears – Quick Facts
• Arrears occur when a borrower misses a scheduled mortgage payment
• A mortgage can be in arrears after 1 missed payment
• Arrears can negatively affect credit and future borrowing ability
• Continued arrears can lead to default, right of offset and enforcement action
• Lenders track arrears closely as a key risk indicator
What Do Mortgage Arrears Mean in Canada?
In Canada, mortgage arrears refers to the status of a loan when the borrower is behind on scheduled payments. Once a monthly payment is past due, the mortgage is technically in arrears.
Being in mortgage arrears does not automatically mean default, foreclosure or power of sale; the enforcement process varies by province. Many borrowers enter short-term arrears due to temporary cash flow disruptions and resolve the issue quickly. However, arrears signal elevated risk to lenders and can escalate if not addressed promptly.
Why Do Arrears Matter for Mortgages?
Arrears matter for mortgages because they affect credit history, lender risk assessment, and long-term mortgage outcomes. When a mortgage enters arrears, lenders may report the missed payment to credit bureaus, which can lower the borrower’s credit score.
Persistent arrears increase the likelihood of default. If arrears persist for multiple payment cycles, lenders may initiate formal default procedures, which may include collection activities, legal enforcement, or foreclosure or a power of sale, depending on the province and contract terms and conditions.
From a system-wide perspective, arrears rates help lenders, regulators, and policymakers assess borrower stress and overall mortgage market health.
How Do Lenders Treat Mortgage Arrears?
Lenders respond to arrears based on duration, severity, and borrower communication. A single missed payment often prompts reminder notices or outreach from the lender.
If arrears persist, lenders may apply late fees, restrict account features, or require repayment arrangements. Prolonged arrears can trigger default notices and legal action under the mortgage contract.
Lenders generally prefer early communication. Borrowers who contact their lender promptly and propose a repayment plan often have more options available than those who remain unresponsive.
How Mortgage Arrears Work in Practice
Mortgage arrears typically follow a progression if unresolved:
Step 1: The borrower misses a scheduled mortgage payment.
The mortgage enters arrears immediately after the due date passes.
Step 2: The lender issues payment reminders or notices.
At this stage, the borrower can return the mortgage to good standing by paying the outstanding amount.
Step 3: Arrears continue over multiple payment periods.
The lender may escalate collection efforts, report the arrears to credit bureaus, or require a formal repayment plan.
Step 4: The mortgage enters default if arrears persist.
Prolonged arrears can trigger enforcement actions, including demand letters, foreclosure, or a power of sale, depending on provincial rules and contract terms.
Arrears Versus Default
Mortgage arrears and mortgage default are related but not identical. Mortgage arrears refer to missed payments, while a mortgage default refers to a more serious breach of the mortgage contract, typically after arrears persist for an extended period, usually a fiscal quarter or more (90 days or more).
A borrower can be in arrears without being in default. However, unresolved arrears often lead to default if the situation does not improve.
Common Mistakes and Misunderstandings About Arrears
• Assuming arrears only apply after several missed payments
• Believing short-term arrears have no credit impact
• Ignoring lender communication after missing a payment
• Confusing arrears with foreclosure or power of sale
• Assuming arrears automatically cancel mortgage protections
Frequently Asked Questions (FAQ) About Arrears
How many missed payments put a mortgage into arrears?
A mortgage enters arrears after a single missed payment, once the due date passes without payment.
Do arrears affect my credit score?
Yes, lenders may report arrears to credit bureaus, which can negatively affect credit scores.
Can I fix mortgage arrears?
Borrowers can often resolve arrears by paying missed payments, establishing repayment plans, or communicating with the lender early.
Are mortgage arrears the same as default?
No, mortgage arrears are missed payments, while default occurs when arrears persist, and the borrower breaches the mortgage contract.
Can arrears result in a power of sale in Canada?
Yes, in some provinces, if arrears persist and the mortgage defaults, lenders may initiate a power of sale or foreclosure; the specific enforcement action depends on provincial law.