Have some extra money and want to know whether you should put it toward your mortgage payments? Making prepayments on your mortgage could save you thousands of dollars over the years…just as long as your mortgage lender allows them. Here’s some information, courtesy of the Financial Consumer Agency of Canada, to help you make the best decision.
A mortgage prepayment is any amount you pay in addition to your regular payments. This can include increasing the amount of your regular mortgage payments or making a lump-sum payment to reduce or pay off your mortgage balance. The sooner you can make prepayments, the less interest you will pay over the long term. For example, consider a 25-year mortgage of $150,000 with a 5.45% interest rate. Assuming the interest rate remains the same over the life of the mortgage, the monthly payments would be about $911. Increasing the payments by $50 per month would pay off the mortgage two years sooner and save $14,000 in interest.
A one-time lump-sum payment of $15,000 in the second year of that same mortgage would result in paying off the mortgage more than four years earlier and saving over $33,000 in interest.
Check your mortgage agreement first, because not all mortgages have prepayment privileges. A closed mortgage may require you to pay a penalty or fee for any prepayment.
Federally regulated financial institutions, such as banks, must show your prepayment options in an information box at the beginning of your mortgage agreement. It will specify whether you can make prepayments, when you can do so, plus other related terms and conditions. Read your mortgage agreement carefully, and before signing ask the lender to explain anything that you don’t understand.
When shopping for a mortgage, ask the following questions:
- How much can I prepay without penalty or fee?
- Is there a minimum amount for a prepayment?
- When can I make prepayments?
- Are there any conditions or limitations?
- If there are fees or penalties, how much are they, and how are they calculated?
Want to know more? The Financial Consumer Agency of Canada has more information on this topic at itpaystoknow.gc.ca.