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Get to Zero – Faster with Prepayment Privileges

July 28, 2017

Your mortgage is most likely the biggest investment (and debt) that you will likely take on during your lifetime. The good news is, that there are a number of ways to pay off your mortgage faster which has two very powerful effects: you’ll be mortgage free faster and you’ll pay less in interest to the bank.

You may not know this, but most mortgages come with pre-defined prepayment privileges which dictate how much more money you can put towards your mortgage over and above your regular payment. The additional money that you decide to prepay goes directly towards the principle of the mortgage – getting you that much closer to zero.

What typically happens with my mortgage?

Your mortgage is typically based upon an amortization schedule (typically 25 years) and a series of smaller terms. Assuming you’ve made every regular payment each month and don’t refinance your home, your mortgage amount will be zero at the end of the amortization schedule. Your regular monthly payments may fluctuate as your term conditions change or as interest rates fluctuate. You may now be asking, “What if I don’t want to wait 25+ years to pay my mortgage off?”

Well, this is where your prepayment options come in. Different mortgage products have different prepayment options with some being more generous than others. After all, you may receive a promotion, an inheritance or some other change in finances and may choose to want to pay off your mortgage faster. The more generous the prepayment privileges the easier it will be to pay down your mortgage faster without any penalty.

When it comes to prepayment options you have two options: a lump-sum payment (limited to a certain percentage of your original mortgage total) or adding an amount over and above your regular payment.

How Does a Lum-Sum Payment Work?

Your mortgage agreement will likely have a condition for lump-sum payments. The total amount of lump-sum payments you can make each year is typically in the range of 5% to 20% of your original mortgage amount.

For example, if you start with a $300,000 mortgage and you have a lump-sum payment privilege of 10% – you can put $30,000 in lump-sum payments towards your mortgage each year. That $30,000 limit does not change as your mortgage amount decreases; you will always have $30,000 available each year in lump-sum prepayments.

What about monthly or periodic prepayments

You may also choose to increase your regular monthly payments in order to shave years off of your mortgage. Similar to the lump-sum payments, there is a set percentage of your monthly regular mortgage payments that your lender will allow you to pay on top of the standard amount. This is also typically in the 5% to 20% range.

If you want to learn more about monthly prepayments, watch this video about one client who is now set-up to shave $60,000 off of their mortgage!

What Does it Mean for the Average Home-Owner?

Admittedly, for most Canadian home-owners, putting an extra $30,000 down on their mortgage each year isn’t realistic; however, in the case of a windfall, promotion or inheritance – you will much rather have the ability to get rid of your mortgage faster than to not have it.

What is realistic for Canadians is the ability to top-up their monthly mortgage payments, and make use of their monthly pre-payment privileges. Increasing your regular mortgage payments by as much as 5%-10% each year can significantly save you thousands of dollars in interest and allow you to become mortgage free years earlier. And if you need help with staying on track, why not take advantage of MonsterMortgage.ca’s Monster Terminator Program, where we have helped thousands of our clients get to zero – faster!