What Are Pre-Payment Privileges?
Simply put, a pre-payment privilege is the ability to pre-pay a specified (extra) portion of your mortgage’s principal balance before payment is due without incurring any penalties.
In most cases, fixed-term and/or closed mortgages will contain a clause allowing for pre-payment privileges. This means you can contribute either a full or partial principal payment, separate from your regular payments once a year, depending on the terms and conditions outlined in your mortgage agreement. Depending on the lender, this pre-payment amount ranges anywhere from 10% to 25% of your total mortgage each year.
Other privileges may give you the option to increase your monthly payment amounts a whole, therefore paying down the principal a little each month, as opposed to once a year, as outlined above. In some cases, these monthly increases may contribute to the annual pre-payment allowance outlined in your contract.
Learn more about the varying pre-payment options below:
Increasing Your Payments
Many lenders will give you the option to increase your mortgage payment amount. Depending on the lending institution, you may be able to up your payments once a year, once a term or as often as you’d like, depending on your loan conditions. The approved increase amount will depend on the lender but will usually range from 10% to 25% of your current monthly mortgage payment amount.
Ex: If your mortgage payment is $1,500 per month, you may be able to increase it to $1,650 per month ($1,500 x 10% = $1,650). For an extra $150 a month, you’ll be able to tackle your mortgage principal faster, enabling you to become mortgage-free a whole lot sooner.
Making Extra Payments
Many lending institutions will also allow you to make additional payments on your mortgage. Here again, how payments are applied depends on the lender who may allow a single, one-time lump sum payment, or several lump-sum payments a year.
In some cases, homeowners may opt to make a lump-sum payment in addition to increasing their regular monthly payments. Referred to as “Doubling-Up,” mortgage borrowers may have the option to double their mortgage payment (i.e. from $1,000 a month to $2,000) for a set period of time. However, the extra amount you pay monthly generally cannot exceed the 10% - 25% per year rule outlined in your contract.
Lump-sum payments may also be an option. This particular payment privilege allows homeowners to make large, lump-sum payments on their mortgage principals once a year, or more, depending.
Just how much you’ll be allowed to contribute as a lump-sum payment will depend on your lender and mortgage terms. Some will let you put down as much as 25% of the total principal amount owing, while others may only allow 10%.
Ex: If you borrowed $150,000 originally, your lender may allow you to pay and extra $15,000 - $37,500 in a lump-sum payment (usually once a year).
As we mentioned, every lending institution has its own set of rules regarding lump-sum payments, how much you can put towards your mortgage and when. Some lenders may even blend the total from your lump-sum payments with any additional payments you may make monthly.
Please give us a call for more information
Shorter Amortization Periods:
Your amortization period is the length of time it takes to pay off your mortgage loan, both principal and interest. When you apply for your loan, you’ll decide on your mortgage term (generally 1, 3, 5, or 10 years and an amortization period which, for most homeowners, is usually set at 25 years.
Once your term is complete, you have the option to renew and renegotiate your current loan terms – including the amortization period. Depending on your current financial goals, you may wish to reduce the length of time it will take to pay off your mortgage from 25 years to 20, 15, 10 or even 5 years. While this will increase your monthly payment, you’ll pay your mortgage off much faster and at a lower interest rate (if interest rates are the same or lower than what you were previously paying).
Ex: Let’s say you’ve signed up for a 5-year term with a 25-year amortization period. Once the first five years have passed, you’ll be eligible to renew your loan and will have 20 years left on your mortgage. If affordability allows, you may opt to pay your mortgage off faster by renewing for another 5 years at a 15-year amortization (instead of 20). You’ll see a slight increase in your monthly payments, but you’ll be loan-free five years sooner.
Combined with the amount you’ll save in interest, this means you’ll pay off your mortgage faster while saving potentially thousands of dollars at the same time.
In short, the shorter your amortization period, the larger your monthly payment amount, and the quicker you’ll pay off your mortgage. We recommend exploring your options come renewal time, when your mortgage broker will help you decide on the right option for your unique situation.
Note: If you have questions regarding pre-payment privileges and which option(s) may be right for you, we’re here to help. Simply give us a call to learn more.