Take advantage of your prepayment privileges
If you have some extra cash this year, consider putting those funds toward your mortgage principal. Most lenders will allow you to pay up to 20% of your original mortgage amount as a principal payment without incurring any prepayment fees. Even better: It doesn’t just have to be a lump sum.
Many lenders will allow you to increase the amount of your regular monthly payments up to 20%, or double your payments (all money that exceeds the normal amount goes towards paying the principal), or any combination of the three, so long as it does not exceed 20% of the original mortgage payment annually.
For many families, the combination of making regular RRSP contributions and using the resulting income tax refund as their source of cash for making a mortgage principal payment is a great option.
This can be a very attractive way to grow your net worth by both increasing assets in your RRSP, and reducing your mortgage liability. Here are some tips to reduce or avoid prepayment penalties: 1. Ideally, use up your entire prepayment privilege every year. As you pay down your mortgage balance, your future prepayment penalties will then be based on the lower amount.
For example, if you must pay-out your mortgage before the end of the term, make sure to make your maximum lumpsum prepayment before you pay it out.
2. Think about waiting until the end of your mortgage term to pre-pay if your prepayment penalty is going to be a large amount. This way, you can make a lump-sum payment without penalty.
3. If you are planning on purchasing a new home, check with your lender about mortgage portability. What this means is taking your existing mortgage term and interest rate and applying it to your new home. It may be a combination of your existing mortgage and a new mortgage for the additional funds required, if any. This will help you avoid breaking your current mortgage and having to face prepayment penalties.
4. Whether you’re looking for a new mortgage provider or renewing your mortgage, remember to shop around. Various lenders and mortgage brokers provide different rates, terms and prepayment options that will offer you the flexibility that suits your needs. Prepayment charges fast facts
If you have a closed or convertible fixed rate mortgage and you prepay more than is allowed by your prepayment privileges you will be subject to prepayment charges. You may also be subject to a prepayment charge if you: • Refinance your mortgage • Pay out your mortgage to transfer it to another lender Prepayment charges on a fixed rate mortgage may vary over time for the following reasons: • Posted mortgage rates change over time. As posted mortgage rates change, this impacts the interest rate differential calculation since it is based off the difference between your annual interest rate and the current posted interest rate of a mortgage that most closely resembles the remainder of your term. • You pay down your principal as you make payments. Part of each payment you make goes towards paying down your principal. As you make payments your outstanding mortgage amount decreases. Provided posted mortgage rates do not change significantly, your prepayment charges will also decrease. • The number of months remaining on your mortgage term reduce over time. As you pay down your mortgage, the amount of time remaining on your term decreases, which will impact the interest rate differential calculation.
For variable rate mortgages, the prepayment charge is three months’ interest calculated using the interest rate on your mortgage. Prepayment charges on a variable rate mortgage will decrease as you make payments. Part of each payment you make goes toward paying down your principal and, as a result, decreases your prepayment privilege over time.
To learn more about your prepayment options, contact us at Canadian Western Bank. We’re here to help.
Holly Kennedy is a personal sales and marketing specialist with Canadian Western Bank.