Unlocking the Power of Mortgage Pre-Payment Privileges: A Path to Early Mortgage Freedom
Owning a home in Canada is a significant achievement, but the journey to full homeownership involves managing a mortgage. This article is your guide to understanding and harnessing the potential of mortgage pre-payment privileges, a smart strategy that can save you money and bring you closer to paying off your mortgage sooner than you thought possible.
What Are Pre-Payment Privileges?
Before we delve into the different ways you can use pre-payment privileges, let’s grasp the basics. Your mortgage has two main components: the principal and the interest. The principal is the original amount you borrowed to purchase your home, and the interest is the cost you pay to the lender for borrowing that money. Every mortgage payment you make is divided between reducing the principal and covering the interest.
Pre-payment privileges empower you to make extra payments towards your mortgage, separate from your regular monthly payments. These extra payments go straight towards lowering the principal, effectively shrinking the amount you owe faster and reducing the interest you’ll need to pay overtime.
Four Effective Ways to Utilize Pre-Payment Privileges
1) Lump Sum Payments
Imagine being able to make extra payments beyond your usual monthly mortgage installments. That’s what lump sum payments allow you to do. You can contribute fixed amounts or percentages of your principal mortgage amount, depending on the terms set in your mortgage agreement. These additional payments are designed to shrink your original mortgage amount, ultimately leading to lower interest payments over the life of the loan.
Lump sum payments can be executed in four ways:
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- Before your mortgage term ends.
- At the end of your term.
- On specific dates outlined in your contract.
- During specific times throughout your mortgage term.
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Here’s a markdown table showing the prepayment difference for a mortgage of $500,000 at an interest rate of 5.54% and 25 year amortization, compounded semi-annually, using different lump-sum payment options. Please note we will use this scenario throughout the blog.
*Disclaimer below
In this table, the “None” row represents the scenario where no additional annual lump sum payments are made. The subsequent rows show the impact of making annual lump sum payments of $1,000, $2,500, and $5,000 at the end of each year, respectively. As you can see, making these lump sum payments accelerate the mortgage payoff time and results in significant interest savings.
2) Increasing Regular Payments
If you find yourself in a position to comfortably increase your regular mortgage payments, this strategy can pay off immensely. By discussing this option with a mortgage broker and ensuring it’s allowed, you can boost your bi-weekly or monthly payments. This acceleration can significantly expedite your journey towards a mortgage-free life and reduce the total interest you pay.
*Disclaimer below
In this comparison, the “Standard Monthly” payment type refers to the regular monthly payment without any extra payments. On the other hand, the “Rounded-Up Monthly” payment type involves rounding up the standard monthly payment to the nearest hundred and making that rounded-up amount the monthly payment (+$36.39/m). This approach results in paying off the mortgage faster and saving significantly on interest payments ($12,026) over the life of the loan.
3) Double-Up Payments
No, we’re not talking about a double-double coffee – we’re talking about doubling your mortgage payments. Double-up payments allow you to make an additional payment equivalent to your regular mortgage payment. While not all lenders offer this option, some provide the opportunity once a year. This can be particularly advantageous if you receive bonuses, pay raises, or any extra income on a regular basis.
*Disclaimer below
In this table, the “Standard Monthly” payment type refers to the regular monthly payment ($3,063.61) without any extra payments. The “Doubled-Up Payment” payment represents a scenario where a doubled-up payment (total of $6,127.22) is made for every payment. Both the “Standard Monthly” and “Doubled-Up Payment” scenarios have different monthly payment amounts, with the latter strategy drastically reducing the interest paid and shortening the mortgage payoff time by more than 16 years sooner.
4) Accelerated Payment Options
By opting for accelerated payment options, you can make weekly or bi-weekly payments instead of the typical monthly schedule. This might sound simple, but it’s a powerful method to chip away at your mortgage paying it off 2 to 3 years sooner. By the end of the year, you’ll have essentially made an extra monthly payment, effectively reducing both your principal and interest payments.
*Disclaimer below
Please note that these calculations are based on the provided mortgage amount, interest rate, compounding frequency, and different payment options. The “Standard” payment type refers to regular payments without any prepayments, while the “Accelerated” payment type includes additional payments equivalent to one extra payment per year.
Understanding the Potential Hurdles
While the perks of pre-payment privileges are undeniable, it’s super important to be mindful of any possible financial penalties that might come along with them. Some lenders might charge you extra if you decide to make pre-payments, especially if it’s during specific times or if you exceed certain limits. To keep away from any unwelcome surprises, it’s a great idea to have a chat with a mortgage broker before you start using these pre-payment privileges.
Getting the Most out of the Good Stuff
Pre-payment privileges are like your secret weapon as a homeowner in Canada. They give you the power to take control of your mortgage, speed up the process of paying it off, and save a bunch of money on interest. Whether you’re thinking about making lump sum payments, paying more each month, doubling your payments, or going for the faster options, every move you make to lower the amount you owe on your mortgage is a step closer to owning your home without any debt.
To really make the most of pre-payment privileges, here are a few things to remember:
a) Get a good grasp of the fine print – the rules and conditions set by your specific lender.
b) Keep in mind that there might be penalties or rules you need to consider.
c) Think about how those extra payments are going to change things for your whole mortgage.
Wrapping it Up: A Route to Financial Security
In today’s world of real estate, mortgage pre-payment privileges are your ace in the hole when it comes to securing your long-term financial freedom. By being clever with how you use these privileges, you’re not only investing in your home but also taking the reins of your financial future. So, whether you’re someone who’s been around the block as a homeowner or just starting your journey in property ownership, remember that if you play your cards right with pre-payment privileges, you’re paving the way for a brighter future without the burden of debt. Your mortgage is more than just another monthly expense – it’s a chance to shape where your finances are headed.
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*Disclaimer: Please note that these calculations are approximate and based on the provided mortgage amount, interest rate, and compounding frequency. The actual savings and payoff times may vary based on the specific terms of your mortgage agreement. It’s always a good idea to consult with your lender or a financial advisor to understand how making rounded-up payments could benefit your unique situation. Rates are subject to change without notice. The intent of this article is for illustrative purposes only. This is not a commitment to lend, pre-approval or approval.
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CHRISTINA PENTLICHUK
Mortgage Agent, Level 2
Lic # 13511
christina.pentlichuk@vinegroup.ca
289.779.8969
66 Main Street E, Grimsby, ON L3M 1N3
