What is a Grace Period?

Loan and insurance contracts will typically establish a certain time frame after the actual due date in which the late payment can be made without any additional fees, default or cancellation. This is what we refer to as a grace period. The duration of grace periods can vary significantly and should be clearly specified in the contract.

After the expiration of the grace period, the borrower will incur different late payment penalties, as detailed in the mortgage or insurance document. These penalties come in various forms:
A hike in the interest rate after the expiration of the grace period.
The obligation to pay a fee on top of the total amount that was due.
The cancellation of the loan or line of credit.
Where real estate properties are offered as collateral, missing several payments will result in default and seizure of the assets by the lender.

For instance, an owner takes out a loan to renovate a property and the loan document specifies the amount due each month on the 7th, with a grace period of five days. If the borrower misses the monthly payment on the 7th, as well as the 5-day grace period (doesn’t make a payment on the 12th, either) the lender can then take further action to recover their loss, as agreed to in the initial loan document.

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