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Mortgage Prepayment

When you sign your mortgage contract, you’re agreeing to pay a certain amount for a certain length of time. This is known as the mortgage term.

When you first get a mortgage, your monthly payments are based on the amortization of your mortgage, or how long it will take to pay off. This is usually an industry standard of 25 years – the maximum amount of time allowed for CMHC insured mortgages. By spreading out payments over as long as possible, you reduce the monthly payments, but increase the total cost of interest.

By paying more than the agreed on monthly payments, you can save thousands of dollars in interest over the life of the loan, and be mortgage free years sooner. This is known as mortgage prepayment, but there are several rules to follow.

Open vs. Closed Mortgages

An open mortgage means you’re allowed to pay back the mortgage in full at any time without penalty. This is great if you suddenly need to sell your house, or come into a large amount of money and wish to be mortgage free, but open mortgages have higher interest rates than closed mortgages.

A closed mortgage means you are not allowed to repay the loan in full at any time, and must adhere to the rules set out in the mortgage contract. Despite being subject to rules, there are still annual or monthly allotments for pre-payment that can help accelerate your mortgage repayment.


 

 




Monthly Prepayment

Lump Sum Prepayment

What is it?

A percentage increase on your monthly mortgage payments

An annual limit that you are allowed to contribute up to a cap

How much is it?

0-100%

0-25%

What does that mean?

The percentage represents how much more of your current monthly payment you’re allowed to add. A 100% increase doubles your monthly payment

The percentage represents how much of your remaining mortgage amount you are allowed to pay at once per year. A 25% payment means a quarter of your remaining mortgage (ignoring interest)

 

There is also a third option called weekly, or accelerated bi-weekly payments. Weekly payments are made every week, and accelerated bi-weekly payments are made every other week. Instead of allowing you to pay a certain amount of your choosing (up to a cap) per month or per year, weekly or accelerated bi-weekly payments change your payment schedule.

A monthly payment schedule results in 12 payments per year, one per month. A weekly schedule changes those payments to every week, and an accelerated bi-weekly payment schedule increases this to 26 payments per year, all of equal value. The reason is because there are 52 weeks in a year, and paying every week or two weeks means there will be 52 or 26 payments. These payments will typically be around a quarter or half the cost of a monthly mortgage payment, as they’re every week or two, but have the added benefit of adding another pay period during the year which goes towards the principal. For the equivalent of one more monthly mortgage payment per year, you can shave years off your mortgage.

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