Taking advantage of pre-payment privileges

Every one of my clients will receive the same mortgage education as the next, and a hot topic, among many, is always pre-payment privileges.

Most lenders offer a very similar pre-payment privilege package today and that is that you can prepay up to 20% of your original term’s mortgage amount, but in fact only less than 19% of Canadians take advantage of this benefit.

Most are taught to look for the best interest rate mortgage and then are also told to find out what the pre-payment privileges are. Once they find out what they are, 81% of Canadians won’t even think about it until their renewal.

I’m quite curious to see how many of my clients will take advantage of the ‘payment shock elimination strategy’ I’ve been teaching so many over the course of the past few years and have written about in this column a few times.

Many of my clients are beginning to return to me for their mortgage renewals, and as the statistics suggest, some do use the privilege, unfortunately many don’t.

I was very pleased to find out this week that one of my clients, whom took advantage of one of the last true ‘zero down payment’ mortgages in September 2008, with a 5.35% rate and a 40-year amortization, has only 18.5 years remaining on his amortization based on his renewal form.

Once we take into consideration the much lower rates that are available, and then keep his payments the same, his amortization is reduced to only 15 years, then we’ll put his payments on a bi-weekly accelerated program and lower this timeframe to only 13 years.

All of these savings by barely changing his monthly (in effect because of him originally taking advantage of the pre-payment privilege and now super low interest rates) mortgage budget while turning a 40-year amortization into an 18-year mortgage.

Over the five year period he increased his payments by over $380/month, or $140 every two weeks, and saved himself over 20 years of mortgage time and thousands upon thousands of dollars of interest. When put into perspective, he increased his payments a little bit every year and dramatically decreased his mortgage time and increased his equity position as well.

I know not everyone will be able to take advantage of these privileges, but if you increase your payments just by $40 every couple of weeks, you can set yourself up for a rosier future, untied to the hinges of the banks.

Jean-Guy Turcotte is an Accredited Mortgage Professional with Dominion Lending Centres-Regional Mortgage Group.