Utilizing your mortgage prepayments can drastically reduce your principal and amortization. If you follow this guide you can be mortgage free sooner than ever!
1. Knowing your prepayment privileges
Most mortgages have allowances for you to prepay down your mortgage faster. The standard prepayments allowed per payment can vary dependent on who your mortgage provider may be. Typical prepayments allow between 10% - 20% per payment depending on your lender. Some lenders also allow the use of double up payments which is an increase of 100% of the payment! Lump sum payments are another great way to reduce your mortgage and are typically ranging between 10% - 25% based off the mortgage amount and dependent on the mortgage provider. The easiest way to access this information would be discussing with your Mortgage Broker or mortgage provider directly.
2. Increasing payments
Anytime you are increasing your payments the excess that you pay per payment goes directly onto the principal portion of your mortgage. The great function of this is drastically reducing the interest you will have to pay over the term of your mortgage. The prepayments can range from 10% - 20% on average depending on your mortgage provider. It is always a good tip to talk with your Mortgage Broker about the goals you have with your mortgage to ensure you have the flexibility you require to pay your mortgage faster. Your mortgage provider may 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 with ease. This allows you to manage your payments at all times throughout the life of your mortgage. Mortgage providers allow this typically free of charge but with some providers you can only change your payments a set number of times throughout the year. Always discuss with your Mortgage Broker or mortgage provider to learn your flexibility options.
Here are how the prepayments can affect your mortgage!
All calculations are based off of a $400,000 mortgage with a 5 year term, 25 year amortization at a rate of 2.89% with monthly payments.
Monthly payment: $1,870.48
Principal paid over 5 year term: $58,401.49
Interest paid over 5 year term: $53,401.49
Mortgage amount remaining: $341,172.69
Years remaining on mortgage after 5 years: 20 Years
Utilizing 15% Prepayments
Monthly payment: $2,151.05
Principal paid over 5 year term: $76,907.34
Interest paid over 5 year term: $52,155.66
Mortgage amount remaining: $323,092.66
Years remaining on mortgage after 5 years: 15 years & 7 months
As you can see you reduce your mortgage by $18,080.03 and save $1,245.83 in interest! This reduces your mortgage by 9 years and 5 months in only 5 years! If you continue to use your prepayments, you can get your family mortgage free sooner! Ask your Mortgage Broker about your prepayments today!
3. Lump sum payments
Utilizing your lump sum payments is a great option for paying down your mortgage but it may not be ideal for everyone. Lump sum payments are usually between 10% - 25% per year. This means you can make a lump sum payment every year onto your mortgage. The lump sum payments can help you reduce the amount of interest you will be required to pay or reduce your mortgage amount before selling your home reducing the penalty you will be required to pay. Every mortgage provider has their own specific guidelines to how you can make a lump sum in a calendar year. Your mortgage provider may require you put down a minimum amount for a prepayment or only eligible on the anniversary date of your mortgage. It is always a great idea to discuss your goals with your Mortgage Broker to ensure this is the right option for you and your family.
If you decide that prepayments are for your household, you can become mortgage freedom sooner than ever!
Reach out to your today to set your goals into motion!
Sherri Vigna - Mortgage Agent
CENTUM Omni Mortgage Corp.
282 Geneva Street, St. Catharines, ON
T: (289) 337-1304