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Financial Ed 101 4th Class – Prepayments & Breaking Explained

Want to pay your mortgage off faster? Want to know the cost of Breaking?

Prepayment options vary slightly from lender to lender, however most you can pay off your mortgage in 5 yrs or less should you have that much money available to you.

SHAVE 2-3 years off your mortgage right now: Take a biweekly or weekly payment instead of monthly. It works out 2 months a year you’ll pay 3 times in those months that have 3 Fridays, same as paying 13 months over 12 months of mortgage!

Prepayments of 2 lenders we often use:

ING, “25/25” full info here

  1. 25% lump sum allowed each anniversary year of your mortgage (which would then pay of your mortgage in 4 yrs)
  2. AND up to 25% increase on your regular mortgage payment as well each anniversary year

 

First National, full info here

  1. 15% lump sum
  2. 15% payment increase
  3. AND allowed to ‘double up’ each and every mortgage payment as you wish. (this is one of my favourite ways to pay down)

    which again would have your mortgage paid off in about 4 yrs or less, you can do any 1 OR ALL combination of these 3.

Having said the above, most other lenders (RBC, TD, Scotia, BMO, etc) are at 10/10 or 15/15 on average.

For a fixed mortgage or a variable mortgage they can both be “closed” meaning you cannot just payout and leave the lender at any time, and for that reason or “commitment” to them, you get the best discounted rates. To have an open mortgage, is generally 2-3% higher rate since you can leave as you need, so they increase rate to ensure some profitability having administered the mortgage for you.

Given the above prepayments scenarios, I find it is very rare that a person finds themselves in the situation of having so much money that they have exercised 25% lump sum or Doubled all mortgage payments after increasing to the max and STILL want to pay further on the mortgage! 

IF SO, then maximize your RRSP contribution, top up your TFSA and if you still have money left over, then well your problem is you have too much money! (not a bad problem to have)

BREAKING YOUR MORTGAGE:

What you’ve no doubt read is people from 2 or 3 yrs ago having a fixed mortgage (say 5.44% for 5 yr closed I obtained in 2007) mortgage they want to “break” to have a lower rate …the lender will charge you since rates are now lower what’s called “IRD” (interest rate differential) for further info on this and other questions, have found posted several related topics here and broker-only preferred lender: first national to be a great resource as well. (they are also Canada’s largest non-bank)

Essentially IRD is the interest you would have paid on your mortgage left compared to existing rates. Which can be $10-$20G IF the new rates are LOWER than your old rate (which is the case for most people right now)

IF however, you were seeking to break your mortgage in 2 or 3 yrs when rates will no doubt be higher, then the IRD doesn’t work since breaking would give you higher rate. In this situation you are charged a 3 months interest penalty is all.

Yours in paying of your mortgage faster,

James Signature

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Here to help inform, educate and represent you in the home financing process.

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