There are a few ways you could do this; utilize pre-payment privileges throughout the year to pay off your mortgage balance quicker, pay accelerated weekly or bi-weekly payments, or take a shorter amortization period. By making a decision upfront which focuses on faster mortgage repayment, not only can you save thousands in interest by shortening your effective amortization, it also allows you to greatly reduce your mortgage balance by the time your mortgage term comes up for renewal. Should rates increase significantly from the time you initially took your mortgage out, the lower balance owing would help by providing a buffer in the event of increased mortgage payments.
The amortization of a mortgage is the total amount of time it will take to pay off your entire mortgage balance owing. The amortization period is broken down into mortgage terms of 1-10 years with the most common mortgage amortization requested at 25 years, although some lenders still offer 30 or 35 years if you are able to put down a larger downpayment. If you select a shorter amortization, your mortgage payment will be higher. If you do decide to take a longer amortization, depending on how you repay your mortgage, you can still reduce your effective amortization by utilizing your pre-payment privileges throughout the mortgage terms you choose.
There are basically 3 ways to pay your mortgage off faster;
- Increase your payment amount
- Increase the frequency of your payments
- Pay lump sums
The advantage of utilizing even a small portion of your allowable pre-payment privilege is; any funds you pay in addition to your minimum mortgage payments will go directly towards reducing your mortgage principal balance owing. By lowering your principal, you will save on interest and your balance at the end of your term will be lower.
We suggest you contact your existing lender or review your original mortgage commitment to find out what pre-payment privileges your current mortgage term will allow without any penalties. The norm in the mortgage market today is 15-20% payment increase yearly and up to 15-20% lump sum yearly (which most often can be paid throughout the year). Some lenders also offer a double-up payment option and/or a skip a payment option.
Here are some examples of how you can save money by utilizing your mortgage pre-payment privileges during the initial first 5 year term;
Example: Susan has a mortgage approval for $300,000 with a 5-year term, fixed interest rate of 2.75%, amortized over 25 years.
INCREASING MORTGAGE PAYMENT FREQUENCY
By selecting accelerated bi-weekly payments instead of monthly, Susan will;
- reduce her mortgage balance by an additional $7,452 in just 5 years
- interest savings of $545 over the 5 year term
INCREASE MORTGAGE PAYMENT AMOUNT
By increasing her monthly mortgage payment by 10% once and maintains it for the duration of her 5-year term, she will;
- reduce her mortgage balance by an additional $8,870 in over the 5 years
- interest savings of $583 over the 5 year term
LUMP SUM PAYMENT ONCE YEARLY
Let’s say Susan receives an annual bonus from work and makes one extra mortgage in the first year of her 5 year term, she will;
- reduce her mortgage balance by an additional $5,905 over the term
- interest savings of $380 over the 5 year term
As you can see, you can save money by utilizing your pre-payment privileges in one of the above 3 ways, or utilize all of them. Keep this in mind when you are considering getting a new mortgage as there are “no-frills” products out there that have greatly reduced pre-payment privileges in exchange for discounted lower rates. This is also helpful if you are looking to reduce your overall personal debt load as you may want to look at refinancing your mortgage to pay off all of your consumer debt and then utilize your pre-payment privileges to pay down your mortgage faster, getting you debt free sooner!