Mortgage Repayment Options
By making thoughtful decisions and small changes, it is possible to reduce the amount of interest that you pay over the life of your mortgage. Your mortgage specialist can compare different interest rates, payment schedules, and amortizations to help you decide which options best suit your budget. If your goal is to pay down your mortgage as quickly as possible, it will also be important to know the prepayment options allowed by your lender.
Amortization refers to the gradual repayment of a debt by means of partial payments on the principal at regular intervals. The amortization period is the time required to repay your mortgage completely.
The amortization period you choose can have a dramatic effect on the amount of interest you pay over the length of the mortgage. Consider the following example*:
$100,000 mortgage with an interest rate of 2.69%*
- With a 30-year amortization the monthly payments are only $404.29
- With a 25-year amortization the monthly payments are increased by only $53.20 to $457.49.
In this example, by choosing a 25 year amortization you save yourself almost $25,ooo and your mortgage is paid off 5 years sooner. Although a 25 year amortization is the norm, have your mortgage specialist prepare comparisons for you to show you the difference a slightly higher payment can make.
Most lenders offer clients the ability to increase their payment once a year. I generally suggest that my clients choose a 25 year amortization to start with, and have them increase the payment afterwards based on what they feel comfortable with. This way, if the higher payment proves to be more than they are comfortable with they can reduce the payment without having to pay fees to re-write the mortgage.
As a general rule, the following Prepayment Provisions are available to you each year of the term of your Mortgage (i.e. during the 12 month period starting from the Interest Adjustment Date, and starting from each anniversary of the Interest Adjustment Date thereafter), provided your mortgage is in good standing:
- Increased payment – once per year, you may increase the amount of the regularly scheduled payment to a maximum predetermined by your lender. This amount is generally either 15% or 20%. The maximum for each payment increase is calculated using the amount of the current regularly scheduled payment in effect at the time.
- Lump Sum Payment – again, this depends on your lender. In many cases you can make lump sum payment of $100 or more on any regularly scheduled payment date, provided the total of these prepayments made throughout the year does not exceed 15% to 20% (whatever the amount allowed by the lender) of the original principal amount of your mortgage.
Most mortgages have very flexible payment alternatives. Weekly, bi-weekly, or monthly payments are most common. These choices also have a great effect on the overall interest payments. Consider the following example*:
$100,000 mortgage at 2.69% interest over a 5-year term 30 yr. amortization
|SCHEDULE||PAYMENT||BALANCE (at end of term)||INTEREST SAVINGS (over amortization)|
* The example assumes the interest rate will remain constant through the whole amortization period.
By choosing a payment schedule other than monthly, you will save a great deal of money over the life of your mortgage. As well, you will likely find it most convenient to hoose the payment schedule that follows your pay dates.
As you can see, there are many ways that you can pay your mortgage off ahead of schedule. By working closely with your mortgage specialist you can be mortgage-free years sooner!