Mortgage prepayment options empower homeowners to increase their monthly payments or pay off their mortgage entirely and without penalty. How will a lump-sum payment affect your mortgage? Read on to learn all there is to know about mortgage prepayment privileges.
- Lump sum mortgage prepayments are the fastest way to pay down your mortgage principal
- You can make mortgage prepayments every month by increasing your payments or accelerating your payment schedule
- Mortgage prepayments may not be the best use of your extra cash
Lump-Sum vs Monthly Prepayment
There are 2 main types of prepayment options available to homeowners. A lump-sum payment is one large payment made towards the mortgage whereas a monthly pre-payment is made every month and is typically agreed upon when you sign your mortgage documents.
If you want to add a monthly pre-payment in the middle of your mortgage term ask your lender.
What is a Lump-Sum Mortgage Prepayment?
Did you stumble into some money? Suddenly have the urge to pay down your mortgage principal? A lump sum mortgage payment can be very helpful for homeowners who want to reduce their mortgage principal quickly. How do you make a lump sum payment? This will differ between lenders as will the frequency with which they allow lump sum mortgage payments. You may, for example, only be allowed a few lump sum payments for the duration of your mortgage term. Check with your lender to be sure!
Not all mortgages allow lump-sum payments
What is a Monthly Mortgage Prepayment?
- Increased Payment Amounts – Many lenders will allow up to a 20% increase in your monthly payments. This comes in handy when you receive a large raise and want to put the money to good use. A small increase can make a difference too, consider rounding up to the nearest $10.
- Accelerated Payment Schedule – Mortgages are set up to be paid once monthly – any increase in that payment schedule is a monthly mortgage prepayment. It’s in your best interest to increase the frequency of your mortgage payments. Not only could you be paying down the principal faster with more frequent payments, but choose ‘accelerated’ and you can shave off your amortization period even more. Many lenders offer bi-weekly, weekly and accelerated options to keep more money in the pockets of homeowners. Did you select regular once-monthly payments when you first signed your mortgage? Some lenders will allow you to change your payment frequency mid-term.
Accelerated vs Non-accelerated
- Bi-weekly – Your regular monthly mortgage payment amount multiplied by 12 months, divided by 24 and paid two times each month.
- Bi-weekly Accelerated – The bi-weekly payment amount is paid every 14 days from your first payment date. In a year’s time, you will have made one or 2 more payments than homeowners who chose non-accelerated payments.
Are Mortgage Prepayments the Best Use of Your Extra Cash?
Prepayment privileges are a great way to get ahead on your mortgage. Prepayments reduce your amortization period so you’ll end up paying less interest and saving more money overall. But, it’s important to consider all your options before making an irrevocable prepayment on your mortgage. Have you maxed out your RRSP for the year? Check if the tax savings on an RRSP contribution would be more beneficial to your financial health.
There are three ways to fast-track your mortgage.
- Lump Sum Payments – A one-off payment against your principal and the fastest way to pay down your mortgage.
- Accelerated Payment Schedule – Increase your payment frequency to weekly or bi-weekly accelerated.
- Increased Payment Amounts – Increase your weekly, bi-weekly or monthly payment amount by up to 20%.
Mortgage prepayments are a convenient way to chip away at your mortgage principal and your amortization period. See How to Pay off Your Mortgage Faster.
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