Regardless of how long you’ve had your mortgage or how large or small the current balance is, there are a variety of ways to make prepayments work for you to pay down your mortgage faster and, therefore, pay less interest throughout the life of your mortgage.
After all, each extra payment amount will reduce your principal balance, which, in turn, reduces the amount of interest you’ll have to pay on your borrowed mortgage amount.
Most lenders allow you to make a lump-sum payment of anywhere between 5% and 20% of the value of your mortgage per year.
The lump-sum payment is based on either the original amount you borrowed or the amount currently outstanding. Since mortgages decrease with each payment, it’s best to negotiate a lump-sum payment option based on the original amount you borrow.
That way, if you come into an inheritance, a bonus or save some extra money, you can pay down the largest amount possible.
Another factor to consider is when you can make a lump-sum payment.
Some mortgages allow prepayments throughout the year, while others permit them only on the anniversary date. Still others allow you to make prepayments on the day you make your regular payment.
If you can’t pay the maximum prepayment amount, it’s still worth your while to at least make some form of extra payments, even if it’s a few thousand dollars each year.
That will still save you thousands of dollars in interest payments throughout the life of your mortgage.
Another prepayment option involves taking advantage of flexible payments.
Most lenders allow you to increase your regular payment up to a set maximum, such as 15%, while others allow you to double up your payments.
If, for instance, you have a $1,000 per month mortgage payment and increase it by 15% to $1,150, you could shave off as much as five-and-a-half years on a $200,000 mortgage.
Even rounding up your mortgage payments a few dollars each payment can help make your balance decline sooner.
If you round up your mortgage payment from, say, $766 to an even figure such as $800, you can feel confident in knowing that every extra bit goes toward your principal.
You can also pay off your mortgage faster by moving to a different payment schedule.
Instead of making monthly payments, make them biweekly or even weekly.
Using an accelerated mortgage payment plan – where you make payments every two weeks as opposed to twice a month – you actually make one extra payment each calendar year. By paying more and paying faster, you reduce your principal earlier, which lowers the amount of interest you pay.
As always, if you have questions about paying your mortgage off quicker, or other mortgage-related questions, I’m here to help!
Jean-Guy Turcotte is an Accredited Mortgage Professional with DLC Regional Mortgage Group in Red Deer.