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Take Advantage of Mortgage Prepayments


Under Mortgage

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December 5th, 2022

To combat rising interest rates, especially if you are locked into a variable mortgage, some lenders allow you to prepay a set amount annually to decrease your principal owing. This will lower the amount of total interest you’ll pay.

The exact amount depends on your financial institution and mortgage terms, however, keep in mind that if you decide to pay more than the maximum allowed amount you may be charged a prepayment penalty.

Turn Your Mortgage Cents into Interest Dollars

With the ongoing media talk about a potential recession in the new year, it’s difficult to envision a willful increase in mortgage payments. In past studies, they have found that less than 25% of Canadians took the action to make an extra payment toward their mortgage balance.

However, it is important to keep in mind that every year inflation rises an average of 2%, with this year being an exception at 6.9% as of October 2022.

So why not consider adjusting your mortgage payments to get the most out of your dollars?

Let’s Talk Numbers

Let’s say that the average mortgage balance in the country is around $500,000, at about 4.84% with a 25-year amortization, making the average mortgage payment $2,863 per month. This means the average homeowner pays roughly $34,356 per year. Upping this by two percent equates to less than $700 that first year. Would you notice a roughly $57 increase per month?

By increasing your payments by 2% annually, you can actually eliminate nearly 25% of the funds you would have paid in interest.

Think you can handle even more? Try popping mortgage payments increased by different percentage points into an online mortgage calculator and check out the amortization table for yourself.

If your annual household income is about $70,000 and rises 2% per year, that’s an extra $1,400 your first year and so on for you to budget into rising costs accordingly.

You may also want to implement this strategy in conjunction with a switch to bi-weekly accelerated mortgage payments. Using the example above, switching to bi-weekly would mean making 26 payments of roughly $1,431, for a total contribution of $37,206 to your mortgage per year.

That’s already nearly $2,850 more per annum than a monthly payment would allow, and would slice years off your 25-year amortization. Couple that with a 2% increase to your mortgage payments per annum and you will have your mortgage paid down even quicker!

For more information and to get help with number crunching, contact your mortgage broker or lender. Where possible, and where you are comfortable doing so, manage your mortgage changes online.

Decrease Your Interest Payments and Pay Your Mortgage Faster by zoocasa

The Effect of Skipping A Mortgage Payment by RateHub.ca | zoocasa

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