Why A Mortgage Vacation Might Be the Most Expensive Vacation You’ll Ever Take

Who doesn’t enjoy a nice, relaxing vacation? When you hear “mortgage vacation,” you probably imagine yourself lying on the beach, sipping on umbrella drinks. Although you have the vacation part right, you forgot the most important part – your mortgage. A mortgage vacation lets you skip paying your mortgage for a few months after you’ve made mortgage prepayments – with a catch.

Mortgage vacations have become a popular feature among mortgage lenders. Here’s how they work: if you run into financial difficulty or you want to use your mortgage payment towards something else, you can go on a mortgage vacation. A mortgage vacation can save you when you’re in a financially bind, but it can also cost you dearly. Through properly financial planning you can avoid going on a mortgage vacation and keep your dreams of being mortgage-free on track.

What is a Mortgage Vacation?

Have you ever received a letter from your lender informing you you’ve been approved for a mortgage vacation? Lenders market mortgage vacations like they’re a privilege, but hidden within the fine print are the consequences of taking a break from paying your mortgage.

To get a better idea of how mortgage vacations work, let’s run through an example. Let’s say your regular mortgage payment is $1,200 per month and you want to skip paying your mortgage for three months while you work overseas in Europe. Unfortunately, there’s no such thing as a free lunch in personal finance. You’ll need to plan ahead of time and prepay the equivalent of three months’ of mortgage payments – that would be $3,600 extra ($1,200 X 3 months).

$3,600 is a lot of money to come up with at once, especially when you’re a homeowner on a tight budget. That’s where your prepayment privileges come into play. By planning ahead you can prepay your mortgage vacation amount – $3,600 – over a longer period of time. For example, if you have a year until your mortgage vacation, you can prepay an extra $300 per month ($3,600 / 12 months) towards your mortgage – that would increase your regular mortgage payment from $1,200 to $1,500 per month ($1,200 + $300).

So What’s the Catch?

It may be tempting to take a mortgage vacation at first glance, but we haven’t discussed an important part yet. When you take a mortgage vacation, although you’re getting a break from paying your mortgage, you’re still accruing interest on your outstanding mortgage balance.

What are the consequences on your mortgage vacation? A little thing called interest capitalization – interest will be added back to your outstanding mortgage principal. Not only could you end up paying thousands in additional interest over the life of your mortgage, you could also extend the amortization period of your mortgage – ouch!

Does it Ever Make Sense To Take a Mortgage Vacation?

Although mortgage vacations will cost you a lot long-term, it’s better than defaulting on your mortgage, losing your home, and ruining your credit rating. For most families their mortgage payment represents their largest household expense. Although mortgage vacations can provide short-term relief from financial hardship, it’s important to remember it’s a loan – you’ll have to get approval from your lender ahead of time. If you’ve lost your job and you’re in financial trouble, your mortgage vacation may not be there when you need it most.

Plan Ahead and Avoid Taking a Mortgage Vacation

Unless you have high-interest credit card debt, it’s a good idea to have an emergency fund. Depending on your financially stability, a good rule of thumb is to set aside between three and six months’ living expenses in your TFSA or a high-interest savings account.

If you’d like to take a break from paying your mortgage, why not save that extra $300 in your high-interest savings account. That way you can use the funds for you planned trip overseas and avoid going on one of the most expensive vacations you’ll ever take.

Have you ever gone on a mortgage vacation? Do you have an emergency fund in place for a financial emergency?

About the AuthorSean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.

I've Completed My Million Dollar Journey. Let Me Guide You Through Yours!

Sign up below to get a copy of our free eBook: Can I Retire Yet?

Posted in

Sean Cooper

Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.
Notify of

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Inline Feedbacks
View all comments
7 years ago


It is not necessarily true that if you dip into your RRSP due to job loss, you will be paying “barely any taxes”.

If I am in the 46% tax bracket, and I lose my job in September, then any cash I take out of the RRSP will be taxed at 46%. You get a tax break only if you’re jobless for a good chunk of the year.

7 years ago

I really don’t get this “cash cushion” thing, especially here in Canada where RRSP deductions aren’t heavily taxed when made prior to a specific retirement age. Maybe someone could fill me in if my thought process is wrong. Here it is. I believe one is much bette off putting his savings into his RRSP/mortgage and get a HELOC. If there is ever a quick need for cash, while still having a job (i.e. access to income) just dip in the HELOC and repay as fast as possible. If cash is needed due to job loss, use the RRSP, on which you won’t be paying (barely) any taxes since it will be your only income. Some might feel a psychological stress to “dipping in their retirement” or “getting into debt”, but I think this is outweighed by the opportunity cost of an emergency fund sitting @1.5% in your TFSA vs. stocks that will grow tax free. Thoughts?

Dan @ Our Big Fat Wallet
7 years ago

If the bank is going to charge extra (interest) for a mortgage vacation couldn’t you accomplish essentially the same thing by simply moving $300 per month into one account and then over onto the mortgage during the “vacation”. Then it’s essentially a timing difference of payments (ie prepaying for 12 months and then moving it over during the “vacation). This wouldn’t cost anything extra aside from possible bank fees even if the mortgage pmts are stopped during the vacation because the mortgage would continue to be paid according to the set out amortization schedule (no extra interest because principal continues to be paid down)

Sebastien Benoit
7 years ago

Further to the previous comment, don’t some lenders request you pay just the interest?

7 years ago

I’m not sure I agree with this article. You would actually be better off prepaying the $300 a month for a year then taking a three month mortgage vacation vs saving $300 a month in a high interest saving account then using that money to pay the mortgage for a year. This assumes your mortgage rate is higher then your high interest savings rate.

You’re better off reducing principal up front as the amount saved in mortgage interest would be greater then the interest earned on savings

7 years ago

Something just isn’t making sense to me. If a mortgage vacation is simply making some future payments at an earlier time, either as a lump-sum or spread out over the previous months, then how do you end up additional interest over the life of the mortgage? Seems to me that you would actually pay less, as a result of having paid for those “vacation” months ahead of time. If I were to make a lump sum of $14400 at the beginning of the year instead of making 12 payments of $1200, I would end up having paid less interest, simply because it is calculated on the daily balance, which is $14000 lower for the entire year instead of gradually being reduced.
I’ve never really looked at any fine print, but what you’re saying about having to pre-pay the full amount doesn’t make sense – as it’s to your benefit and not the bank’s. More likely, you don’t have to pre-pay anything, they just let you stop making payments for a while (thus extending the amortization). And of course, taking 3 months off now won’t just add 3 months to the end, it’s going to be a lot more, depending on your rate and how far away the “end” is.

7 years ago

Yes, have stashed one year of cash (or next to cash), that would cover the basic expenses of running the family. (mortgage, bills, groceries).

Taking a mortgage vacation, sounds as bad an idea as smoking meth!

/Kids don’t do drugs, and don’t take mortgage vacations.