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It pays to pay down your mortgage faster

by Denis Doucet

What you’ll learn

  • Reimburse your mortgage faster
  • Reduce the duration of your mortgage loan

Boost your payments

Double-up, increase payments, anniversary payments are all viable avenues you can use to accelerate your payments to repay your loan term and balance. Increasing your mortgage payments, even slightly, over a few years can save you thousands of dollars in interest costs. What’s more, by doing so you will reduce the amortization period of your mortgage loan as well.

You can benefit from a number of options that let you pay down your mortgage faster and reduce interest costs. Here are a number of examples:

 

Increasing your monthly payment

Angela has a mortgage of $150,000 amortized over 25 years with a fixed rate of 5.45% for 5 years. Her minimum monthly payment is $911. Let’s see how much Angela can save if see increases her monthly payment by only $50 a month.

 
  Monthly payment of $911 Monthly payment of $961
Capital $150,000 $150,000
Interest $123,368 $108,859
Total payment $273,368 $258,859
Interest saved $14,509
Number of years to repay loan 25 22.5

Increasing your frequency of payments

Chris has a mortgage of $150,000 amortized over 25 years with a fixed rate of 6.45% for the entire amortization period. His monthly payment is $1,000. Let’s see how much Chris would save if he accelerated the amount of payments over the course of a year.

 
  Number of payments per year Amount of payments Total amount of payments per year Interest savings
Monthly 12 $1,000 $12,000
Bi-weekly 26 $500 ($1,000/2) $13,000 $29,407
Weekly 52 $250 ($1,000/4) $13,000 $29,751

Prepayment option

Prepayments are a one-time lump sum payment you make in addition to your regular mortgage payments during the amortization period. There’s usually a maximum percentage you can prepay and specific conditions applicable to this option, so please check your mortgage agreement for full details.

Josy has a mortgage of $150,000 amortized over 25 years and its annual limit of prepayment is 10% or $15,000.  

 
During the term of the mortgage No prepayment Prepayment (beginning of the second year)
Lump sum prepayment $15,000
Capital $150,000 $150,000
Interest    $123,368 $90,168
Total amount paid $273,368 $240,168
Interest saved $33,200
Total years it would take to pay back mortgage loan 25 20.7
 
 

Key takeaways
 
  • Increasing your payment frequency can make you save thousands in interests
  • The lump sum capital payments can help you pay your mortgage faster but you must respect certain lender’s conditions
  • Increasing your monthly payment amounts while reduce the duration of your loan and save you interest 
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