Early Mortgage Payoff
Prepay now to get mortgage-free sooner.
For most of us, a mortgage is by far the biggest debt we’ll ever take on. The excitement of home ownership often gives way to the realization that mortgage payments will last for two or more decades. What’s more, a fair portion of these payments go toward interest costs.
What people may not realize is just how big a dent they can put in their mortgage by making prepayments. Having extra payments or larger payments early on can add up to significant interest savings over the life of the mortgage.
While prepayments may seem like a simple solution, it seems that Canadians are not taking this route. Seventy-five per cent of recent home buyers intend to pay off their mortgage sooner, but only 33 per cent had made a lump sum prepayment against their mortgage, according to a recent survey by the Canada Mortgage and Housing Corporation.
Here’s what you could do with a $200,000 five-year mortgage at a fixed rate of 5.45 per cent* and a 25-year amortization:
Add a bit to your monthly payment
Adding an extra $50 onto the monthly payment of $1,215 will save $14,987 in interest over the life of the mortgage, and allow the borrower to pay off the loan just under two years sooner.
Most of us can find an extra $50 per month by cutting out a restaurant meal. Add that money to your mortgage and you’re saving a lot on interest down the road.
Make a yearly pre-payment
Paying an extra $2,000 on this same mortgage once per year on the anniversary date of the mortgage will yield a saving of $39,015 in interest over the life of the mortgage, and allow the borrower to repay the loan just over five years sooner.
For many borrowers, the money for such a prepayment comes from a tax return.
Make a larger prepayment early in the mortgage
Remember, lump-sum mortgage prepayments have a much greater impact on the total amount of interest you’ll pay if they are made earlier.
For example, making a single $5,000 lump-sum prepayment three years into that mortgage on the anniversary date will save $10,882 over the life of the mortgage.
However, waiting 15 years before you make the same payment will result in savings of only $3,446 over the life of the loan.
It’s important to check with a mortgage advisor about any prepayment privileges and penalties that your mortgage may have.
*Typical competitive rate as of September 4, 2008. Rates subject to change. Figures given are for illustrative purposes only. However, no matter the year or interest rate, the result would be paying off your mortgage sooner.