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Mortgage information

Increase the amount of your payments

 

One of the ways to pay off your mortgage faster is to increase the amount of your regular payments. Normally, once you increase your payments, you will not be allowed to lower your payments until the end of the term. Check your mortgage agreement or contact your mortgage lender for your payment options.

 

Example:

  • John is getting a mortgage of $150,000, amortized over 25 years, with a fixed interest rate of 5.45 % for 5 years.
  • The mortgage lender tells him that that he must pay at least $911 a month.
  • He is trying to decide if paying $50 more a month will help him save money.

Assumptions  The interest rate of 5.45% remains the same over the 25-year mortgage.

Total payments over the life of the mortgage

 

Monthly payment at $911

Monthly payment at $961

Principal

$150,000

$150,000

Interest payments

$123,368

$108,859

Total amount paid

$273,368

$258,859


Interest savings


-


$14,509

Years to pay off

25

22.5

By paying an extra $50 a month over the life of the mortgage, John would save over $14,000 and pay off the mortgage two and a half years sooner.

 

 

2. If you renew with a lower rate, keep the monthly payments the same

At the end of your mortgage term, when you renew or renegotiate your mortgage, you may be able to obtain a lower interest rate. Although you would have the option of reducing the amount of your regular payments, you can take advantage of this situation to pay off your mortgage faster. Simply keeping the amount of your payments the same will make you mortgage-free sooner.

Example:

  • Stefanie used to pay $1,000 each month on a $150,000 mortgage.
  • When she renewed her mortgage after five years, the interest rate had decreased by one percent, from 6.45% to 5.45%.
  • While the lower interest rate would have reduced Stefanie's monthly payments to $924, Stefanie decided to keep the monthly payment at $1,000 in order to reduce the total amount of interest she will pay over the term of the mortgage.

Details

  • Stefanie is renewing her mortgage after five years for another five-year term.
  • The remaining mortgage principal amount is $135,593.

Assumptions  The new interest rate of 5.45% would remain the same for the rest of the mortgage.

Keeping the same payments while renewing at lower interest rates
(over the life of 20-year mortgage at 5.45%)

 

Monthly payments at $924
(new minimum payment)

Monthly payments at $1,000
(maintaining previous payment)

Principal

$135,593

$135,593

Interest payments

$86,228

$73,916

Total amount paid

$221,821

$209,509


Interest savings


-


$12,313

Years to pay off

20

17.5

By keeping the monthly payments at $1,000 per month with the lower interest rate for the rest of her mortgage, Stefanie will save over $12,000 and will pay off the mortgage two and a half years sooner.

 

 

3. Choose an "accelerated" option for your mortgage payment

You can spend approximately the same amount of money on your mortgage each month and still save money by choosing an accelerated option for making your payments.

Accelerated weekly and accelerated biweekly payments can save you thousands, or even tens of thousands in interest charges, because you'll pay off your mortgage much faster using these options.

The reason is that you make the equivalent of one extra monthly payment per year.

  • monthly
  • semi-monthly
  • biweekly
  • weekly.

For these four payment options, there is no difference in the total amount you will pay over a year. This means that there is very little extra savings if you switch from a monthly payment option to one of the other standard payment options.

 

 

 

4. Making lump-sum payments: Prepayments

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.

The sooner you can make the prepayment, the less interest you will pay over the long term, and the sooner you will be mortgage-free.

 

Key things to remember

  • Your mortgage agreement will specify whether you can make prepayments, when you can do so and other related terms or conditions. Read it carefully, and ask your mortgage lender to explain anything you don't understand.
  • If your mortgage lender is a federally regulated financial institution such as a bank, as of January 2010, it must show your prepayment options in an information box at the beginning of your mortgage agreement.
  • Your mortgage agreement may specify minimum and maximum amounts that you can prepay each year without paying a fee or penalty.
  • The prepayment option is generally not cumulative. In other words, if you did not make a prepayment on your mortgage this year, you will not be able to double your prepayment next year.
  • A closed mortgage agreement may require you to pay a penalty or fee for any prepayment.

 

 

5.  Questions to ask

When shopping for a mortgage, make sure that you understand the prepayment options and conditions before you sign the contract. Ask the lender the following questions:

  • How much can I prepay without paying a fee or penalty?
  • Is there a minimum amount for a prepayment?
  • When can I make prepayments?
  • Are there any conditions?
  • If there are fees or penalties, how much are they, and how are they calculated?

 

SOURCE : Agence de la consommation en matière financière du Canada /www.acfc-fcac.gc.ca

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