Mortgage Prepayment

Mortgage prepayment options or privileges, as they are more commonly known, describe the ability you have to increase your monthly mortgage payments or make lump sum payments without penalty.

The monthly prepayment privilege is a percentage increase of your original monthly mortgage payment, while the lump sum privilege allows you to put money towards your mortgage principal at various intervals throughout the term.

Mortgages with such prepayment features are especially beneficial to homeowners who have seen an increase in income since their mortgage began or for those that have access to lump sums of money, like through a tax refund, inheritance or just built up savings over time.

These privileges offer two significant benefits to the homeowner:

1. Reduced interest cost over the life of the mortgage
2. Increased equity and net worth building

Let’s take a quick look at what all this really means and how it helps as described above.

Description

Increase Regular Payment

Percentage increase regularly scheduled mortgage payments.

Lump-Sum Prepayment

Annual percentage limit you’re permitted to make a lump sum payment towards your mortgage (resets annually).

Range

0-100% (Double up)

0-25%

Example

You may choose to increase your monthly payment by 15% from $1,000 to $1,150.

The additional will always be applied to your principal directly.

If you’re allowed a 20% lump-sum payment, You may decide in year 1 of a 5-year mortgage term of $100,000 that you make a lump sum payment of 10% or $10,000. In year 2 you make a 5% lump-sum payment or $5,000 and in years 3-5 you make no prepayment

Why make a mortgage prepayment now?
Over the past few months as disposable income increases many Canadians have used this opportunity to pay down debt. By prepaying your mortgage you are reducing interest expenses significantly and shaving years off the life of your mortgage.

Why not make a mortgage prepayment now?
In low-rate environments such as today, you may be able to realize greater earnings through other investment strategies. Making prepayments to your mortgage could take away cash flow which you may otherwise apply towards things like contributing to your RRSP and use the tax savings to then make a lesser contribution towards your mortgage, maximizing your return overall. Building up your TFSA or purchasing an investment property.

Examples of prepayments and the impact on your savings and time reduction:

Scenario 1
15% monthly increase
Initial Monthly: $1,000
Mortgage Amount: N/A
New Monthly: $1,150
Lump-Sum: N/A
Prepay When: Monthly
Interest Savings: $27,656.42
Amortization Reduced To: 13y 10m
Mortgage Balance At 5th year: N/A

Scenario 2 – Part A
10% lump sum prepayment
Initial Monthly: N/A
Mortgage Amount: $100,000
New Monthly: N/A
Lump-Sum: $10,000
Prepay When: 1st year
Amortization Reduced To: 13y 10m
Mortgage Balance At 5th year: N/A

Scenario 2 – Part B
10% lump sum prepayment
Initial Monthly: N/A
New Monthly: N/A
Lump-Sum: $10,000
Prepay When: 2nd year
Interest Savings: $10,628.67
Amortization Reduced To: 19y
Mortgage Balance At 5th year: $61,931.78