A prepayment is a lump-sum payment that you make, in addition to your regular mortgage payments, before the end of your mortgage term. The prepayment reduces your outstanding balance and allows you to pay off your mortgage faster.
Most mortgage contracts permit you to make extra payments towards your mortgage principal balance beyond your regular payment. Making extra payments reduces your outstanding mortgage balance and allows you to pay off your mortgage faster. As your mortgage balance goes down, the proportion of each regular payment that goes towards interest is reduced and the proportion to principal increases. The sooner your balance owing goes down, the less interest you pay and the faster you are mortgage free.
When shopping for a mortgage, make sure that you understand the prepayment options and conditions before you sign the contract.
For any lender under consideration, ask the following questions:
Michael owns a rental property in addition to his own home. Michael plans to sell the rental property in the next spring market and expects to have net equity after the sale of about $100,000, which he would like to put towards the mortgage balance on his own home, his principal residence.
Michael checks and confirms his home mortgage has a 15% annual prepayment privilege and the initial loan amount was $500,000, meaning he can put up to $75,000 per year without penalty. The anniversary date for his mortgage is July 31st and he has been making only the regular monthly payments.
Mike sells his rental in the spring and nets the $100K as planned. He chooses to put $75,000 immediately to his mortgage to use up his pre-payment privilege for the current contract year, and set aside the other $25,000 in savings until August arrives where his annual pre-payment privilege resets for the next contract year. He then makes another $25,000 lump sum payment and - by splitting his extra-payments between contract years - has avoided a penalty for overpaying and knocked years off his mortgage repayment.
You can save thousands of dollars in interest by paying off your mortgage as fast as your household budget allows. These four ways will help you to achieve the goal of being mortgage-free sooner:
With your mortgage paid off, you can direct your household budget to help you achieve other financial goals.
Free Guide: Paying Off Your Mortgage Faster
Richards Mortgage Group
73 Riverview Circle
Cochrane, AB T4C1K3
T: 587.774.6290
TF: 1.888.540.1715
Fax: 587.315.6117
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