Prepayments can get you to mortgage-free faster

Getting mortgage-free faster

Using mortgage prepayment options can drastically reduce the total amount of money you spend on your mortgage. Thus, shortening the time it takes to pay it down.  This puts more money in your pockets, Halifax, for donairs, tickets to the Tattoo, or even getting a new tattoo!  If you follow these three steps, you can be mortgage free faster than ever.

1. Know your prepayment privileges

Most mortgages include allowances for you to use prepayments to pay down your mortgage faster.  The standard prepayment amount allowed per payment can vary depending on your mortgage provider.  Your mortgage provider may also be able to increase and decrease your prepayment privilege at any time throughout the life of your mortgage.

This means that if any life event occurs and you need to reduce your payment to the minimum, you can do so easily.  Most mortgage providers allow this free of charge, but with some providers, you can only change your payments a set number of times each calendar year. So remember, you are the client, and you have privileges.

2. Increase your payments

When you increase your payments, the excess you pay per payment goes directly onto the principal portion of your mortgage.  This is an easy way to drastically reduce the interest you will pay over the long term. Common lender prepayments allow you to add an additional 10 per cent to 20 per cent to each payment.  Some lenders also allow the use of “double-up payments,” which let you double each payment – the extra of course going against your principal. This gets you one step closer to mortgage freedom, Halifax, so if you can, do it!

Typical Mortgage Prepayments:

All calculations are based on a $400,000 mortgage with a 5-year term and 25-year amortization at a rate of 3.39 per cent with monthly payments.

No Prepayments:
Monthly payments: $1,973.93
Principal paid over 5-year term: $55,578.21
Interest paid over 5-year term: $62,857.59
Mortgage amount remaining: $344,421.79
Years remaining on the mortgage after 5 years: 20 Years

Adding a 20 per cent Prepayment:
Monthly payments: $2,368.72
Principal paid over 5-year term: $81,336.55
Interest paid over 5-year term: $60,786.65
Mortgage amount remaining: $318,663.45
Years remaining on the mortgage after 5 years: 14 years & 2 months

As you can see in the example, the mortgage was reduced by $25,758.34, saving $2,070.94 in interest! The mortgage term was reduced an extra 5 years and 10 months – just within the 5-year term!

3. Make a lump sum prepayment

Making a large prepayment can be a great option for paying down your mortgage faster, but this may not be ideal for everyone. Lump sum payments can help you reduce the amount of interest you will be required to pay on your mortgage. Lump sums can also be used to reduce your mortgage amount before selling your home and will reduce the penalty you may be required to pay.  So before spending that lottery win or inheritance on bejeweled Christian Louboutin shoes or a Land Rover, consider making a prepayment on your mortgage.

Lump sum payments can be made annually and are usually 10 per cent to 25 per cent of the total mortgage amount, based on the amount funded. Typically, you can make a lump sum payment once a year, but every mortgage provider has specific guidelines for how you can make a lump sum payment.  For example, your provider may require you put down a minimum amount for a lump sum prepayment, or you may only be eligible for one on the anniversary date of your mortgage.
There are a variety of ways to make prepayments, but all provide one clear benefit: achieving mortgage free status sooner. Freeing up your hard-earned money so you can fulfill your dream of becoming a snowbird!

Have more questions? Feel free to contact us!