Mortgage Pre-Payment Privileges

With the right mortgage product, you could shave years off your loan.

Many lenders will offer some level of pre-payment privileges on a closed mortgage term. Of course, if you have an open mortgage, you can pay down as much as you want, with no penalties.

But as closed mortgage products make up the majority of Canadian home loans, there is usually some wiggle room. In fact, some mortgages may allow as much as '20/20' to be put down against your principal each year. This means you can increase your regular payment by up to 20% AND apply lump sum payments of up to 20% of your original mortgage amount, annually. These amounts go directly to your principal, shortening your amortization (length of mortgage) and saving you interest costs over the life of your mortgage.

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Let's take the 20/20 pre-payment privilege example, and apply it to a $450,000 mortgage loan:

• A $450,000 closed mortgage amortized over 25 years at a fixed rate of 2.44%
• Lender allows for a 20% increase to your regular payments
• With your regular payments of $2,002.43/month with no monthly increase, your remaining amortization after 5 years would be the usual 20 years
• Now increase your regular payments by 20% to $2,402.92/month
• Your remaining amortization after 5 years would be 14 years and 8 months, knocking off over 5 years of amortization!

If you can't squeeze 20% of increased payments out of your budget, adding even a bit more to a monthly payment here and there, or choosing an accelerated schedule, can shorten your amortization.

Lump sum payments can really add up to a shorter mortgage.

Dropping a one-time amount down on your principal every year can reduce the amount of interest you pay each month, and in turn can dramatically reduce your amortization period.

Using the 20% example above, on a $450,000 mortgage at a fixed-rate of 2.44% with a 5-year term, you would have the option to put up to $90,000/year in lump sum payments on your mortgage. If this was the only option you took advantage of, you could pay off your mortgage in less than 5 years.

Of course, we may all dream of being able to do that — but it’s not necessarily realistic. So, many lenders will allow you to apply lump sum payments in increments as low as $100 throughout the year, as long as you stay within that 20% allowance (or whatever allowance your lender provides).

So what's the moral of this pre-payment story?

With flexible mortgage options, you have the freedom to pay your mortgage off a lot faster, and save a pile of cash on your loan. We can uncover your mortgage fine print (do you have a restricted mortgage?), and provide the numbers for different payment scenarios to help you make clear decisions.

Or, if you need something different in a mortgage, we know what's out there, and which lender may be a better solution for you.

Have more questions? Our highly-trained brokers are here to help, and care about getting your best mortgage fit.

Read more: How Is Your Mortgage Registered?