PREPAYMENT OPTIONS

Any additional payment made on your mortgage will end up saving you lots of money in interest. Every normal payment you make consists of principal and interest. The balance owing on your mortgage determines how much is interest. As the balance outstanding reduces, less of your payment goes to interest and more comes off the balance.

For example:

mortgage balance rate payment = principal interest
100,000.00  
78,411.38  
60,591.46  
7%  
7%  
7%  
700.42  
700.42  
700.42  
  =  
  =  
  =  
125.42  
248.12  
350.00  
575.00  
452.30  
350.42  


The following are ways to reduce the amount you owe on your mortgage:


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INCREASING THE FREQUENCY OF YOUR PAYMENTS

Most lending institutions offer you the choice of payment frequency.
The most common is MONTHLY, such as the 1st of every month. This is easy to remember if you are used to paying rent.
Most lending institutions will let you make payments on a different date if that is more convenient for you - for example the 15th day of every month.


Other options generally available are:

SEMI-MONTHLY

Payments are taken twice a month, usually on the 1st and the 15th.
Payments are one half of the monthly amount.

If you pay $1,000 per month X 12 months = $12,000 in payments per year
With this option you pay $500 twice a month  -  $500 X 24 = $12,000.
This option saves you very little money because you are paying the same annual amount, just a little bit quicker. See comparison for an example of the savings.


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BI-WEEKLY  -  accelerated (saves lots of money!)

Payments are exactly half of a monthly payment amount, collected every two weeks.
For example if the monthly payment is $1,000 then the bi-weekly payment will be $500.
This saves you money because you pay an extra $1,000 over a twelve month period.

          How?
Payments are made on the same day every 2nd week. For example in August of 2000, if your payments are Fridays, your payments will fall on August 4th and 18th. The next month they will fall on September 1st, 15th and 29th.
At least twice a year you will have three payments in the month.

Stated another way;

If you pay $1,000 per month X 12 months = $12,000 in payments for the year, but if you pay bi-weekly then it is $500 X 26 = $13,000.
The amount of interest is the same, therefore, the additional payment of $1,000 (or the amount of YOUR monthly mortgage payment) will be deducted from the balance owing on your mortgage.
You will also make an extra small deduction from the mortgage balance because you are making small payments faster than if they were larger, once a month payments.

This is a very easy payment plan to keep up with if you receive a pay cheque every 2 weeks. If you are paid monthly, or semi-monthly (1st & 15th) bi-weekly payments can be very difficult because of the extra payments twice a year - your income won't change, but your mortgage payment will be 1 1/2 times normal (e.g. instead of $1,000 you will have to pay $1,500). See comparison for an example of the savings.


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BI-WEEKLY  -  not accelerated (does NOT save lots of money!)

The $1,000 a month payment is multiplied by 12, then divided by 26.
This equals a bi-weekly payment of $461.54  -  at the end of the year you will have paid $12,000 !

A very small amount of savings are gained due to half of your payment being made early each month.
The main reason for choosing this option would be the convenience of matching your payment to your pay days, with lower payments than the accelerated version.


WEEKLY  -  accelerated (saves lots of money!)

Same as bi-weekly accelerated, except that payments occur on the same day every week. Your payments will be one quarter of your normal monthly payment.

If you pay $1,000 per month X 12 months = $12,000
Then you will pay $250 per week X 52 weeks = $13,000
You pay an extra $1,000 per year, which will be deducted from your mortgage balance.
Sometimes there are 5 weeks in the month and you will have 5 payments in that month. This will happen at least 4 times a year. See comparison for an example of the savings.


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WEEKLY  -  not accelerated (does NOT save lots of money!)

The $1,000 a month payment is multiplied by 12, then divided by 52.
This equals a weekly payment of $230.77  -  at the end of the year you will have paid $12,000 !
A very small amount of savings are gained due to three quarters of your payment being made early each month. The main reason for choosing this option would be the convenience of matching your payment to your pay days, with lower payments than the accelerated version.


COMPARISON

The table below shows a comparison of interest saved and the length of time this takes,
assuming: a mortgage of $142,772.35 at 7% for an original amortization of 25 years.

   monthly semi-monthly * bi-weekly * weekly
  payment
  amort. (years)
  interest paid
  interest saved  
1,000.00  
25  
157,227.49  
0  
500.00  
24.92  
156,085.48  
1,142.01  
500.00  
20.58  
124,238.29  
32,989.20  
250.00  
20.50  
123,850.05  
33,377.44  

* this table only shows the savings for the accelerated versions of weekly & bi-weekly payments. The not-accelerated versions will save approximately the same amount as the semi-monthly payment.


10/10    15/15    20/20

These numbers refer to the percentage the lending institutions will allow you to increase your payments by, or the percentage amount allowed as a lump sum payment.


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INCREASING THE AMOUNT OF YOUR PAYMENTS

Most lending institutions will allow you to increase the amount of your mortgage payment, some allow an increase once per year others only once per term.
The amount of this increase varies from 10% to 20% depending on the lending institution.
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 your mortgage principal, therefore paying your mortgage off faster.

The disadvantage of this benefit is that the increase is usually permanent (until your next renewal date), so you have to be very sure that you can afford this increase.
Please discuss the current policies of the different lending institutions with your mortgage broker.


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PAYING EXTRA ON YOUR PAYMENT DATES

Sometimes referred to as 'double-up' payments.
Most lenders will allow you to make additional payment amounts on your mortgage. These extra amounts are principal only and reduce your mortgage balance and so you pay off your mortgage faster.

The best thing about this benefit is that you are in control of how much extra you pay, and when you pay it.
There are some limitations which vary by institution, but generally speaking you can pay up to double your normal mortgage payment on any (or all) of your payment dates.
Please discuss the current policies of the different institutions with your mortgage broker.


MAKING 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.

The amounts vary by institution, some are up to 20% of the original mortgage amount. So if you borrowed $120,000 originally, they will allow you to pay up to $24,000. This is usually allowed on only one occasion per year.

Each institution has different rules on the amount, and when, you can pay down on your mortgage. Some lenders combine the totals from 'additional mortgage payments' with 'lump sum payments'.
Please discuss the current policies of the different institutions with your mortgage broker.


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SHORTEN YOUR AMORTIZATION AT RENEWAL DATE

At the end of each term, you have a renewal date.
If interest rates are about the same as during your old mortgage term, (or even lower), then you should consider decreasing your remaining amortization. A reduction in your amortization will result in your mortgage being paid off sooner.

Check with your mortgage broker. Renewal time is an excellent time to consider switching your mortgage to another lending institution. A mortgage broker will probably be able to obtain a better interest rate than you can negotiate by yourself. Talk to a mortgage broker approximately 4 months before your renewal date.


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