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Pre-Payment Privileges

What are Pre-payment privileges?  Pre-payment privileges are simply the right to pre-pay a specified amount of the principal balance of your mortgage without incurring any penalties. Most fixed term or closed mortgages will contain a clause allowing for full or partial payment of the principal, separate from the regular payments called for under a mortgage agreement. The pre-payment amount allowed with most lenders will vary from 10% to 25% of the total mortgage amount annually. In addition, some lenders will allow you to increase your mortgage payment amounts.  This may or may not contribute to your annual pre-payment allowance. Let’s look at these options in a little more detail:

Increasing Payments

Most lending institutions will allow you to increase the amount of your mortgage payment.   Some allow an increase only once per year, others only once per term, and some as often as you wish. The amount of this increase varies from lender to lender but is typically 10% to 25% of your current monthly payment. For example: If your present mortgage payment is $1,000 per month you may be able to increase it to $1,200 per month ($1,000 X 20% = $1,200). The extra payment amount reduces a greater amount of your mortgage principal and therefore pays your mortgage off faster. We would be happy to discuss the current policies of the different lending institutions with you.  Feel free to give us a call.

Additional Payments

Most lending institutions will allow you to make additional payments.  This can mean a one-time lump sum payment, or several lump-sum payments throughout the year.  Often this can be done in conjunction with increasing your regular payments.   You may have heard of “Double-Up” payments.  This simply means doubling the amount of your payment for as long as you wish ($2000 instead of the usual $1000).   The total amount you can pay additionally in a year will vary, but usually cannot exceed the pre-payment privilege amount for that year.  The pre-payment privilege amount is always pre-set and ranges from 10% to 25% of the original principle balance.

Lump-Sum Payments

Most lending institutions will allow you to make large lump-sum payments against your mortgage principal. These amounts are principal only and reduce the balance owing rapidly. The amounts vary by institution; some are up to 25% of the original mortgage amount. So, if you borrowed $120,000 originally, they will allow you to pay up to $30,000 in a lump-sum payment. This is usually allowed only once per year. Each institution has different rules on the amount and frequency in which you can pay down your mortgage. Some lenders combine the totals from ‘additional mortgage payments’ with ‘lump-sum payments’.  We would be happy to discuss the current policies of the different institutions with you.

Shortened Amortization

When you acquire a mortgage, you must decide on a term (typically 1, 3, 5 or 10 years) and an amortization (usually 25 years). Once your term is complete, you must renew your mortgage and can renegotiate your interest rate and amortization period. Depending on your current financial status and the going interest rates, you may wish to lower your amortization. This typically works best if interest rates are the same or less than what you were previously paying, or if your financial status is a little bit better than when you first signed the original term. For example, imagine you signed a 5 year term with a 25 year amortization.  After your first 5 year term was complete you would have 20 years left on your mortgage.  If you could afford a slightly higher payment, you could renew this mortgage and sign another 5 year term but this time with only a 15 year amortization.  This would shave 5 years off your total repayment time.  In this way, a reduction in your amortization will result in your mortgage being paid off sooner and saving you thousands. All the amortization period really does is determine your monthly payments.  The bigger you choose to make your payment amount, effectively the smaller the length of time (amortization) it will take to pay off your total debt. Renewal time is always the best time to consider adjusting your term and amortization.   Your mortgage specialist will analyze your particular situation and make recommendation on how to pay off your mortgage faster and save you money, lots of it!