Whether you have plans to apply for a new mortgage or to pay off your current mortgage early, it is extremely important that you take a closer look at your prepayment options. In most mortgage contracts there are special clauses that outline the allowances within your loan that permit you to make additional payments towards your outstanding balance, penalty free.

What is a prepayment option?

A prepayment option allows you to make additional payments against your mortgage during the term of the mortgage without incurring penalties.  It is important to understand that there are often conditions or rules that must be followed when making additional payments and every lender prepayment privileges are different.

Different prepayment options

Almost all institutions offer some form of prepayment privilege, the amount and how it can be applied varies significantly from one to another. Some offer only up to 10%, once per year on the anniversary date. There are others that offer as high as 20% per year and prepayments can be done throughout the year as long as the total does not exceed 20%.

Here are the most common ways a prepayment can be made:

1. Increase Your Regular Payment – This allows borrowers to increase their regular monthly payment. The increase in payment is applied directly in the mortgage principle reducing the total interest costs. Small regular payment increases will help you to pay down your mortgage quicker, saving you thousands down the road due to the effect of interest not compounding on the entire mortgage amount for the life of the mortgage. Should the need arise you can go back to the original mortgage payment. Neat feature to have!

2. Annual lump sum payments – typically these additional payments can be applied against the mortgage balance throughout each year of the mortgage term or on the anniversary date depending on the lender contract guidelines and rules. The payment is applied directly against the mortgage principle reducing the amount of interest paid over the term of the mortgage and shortening the life of your mortgage.

3. Double Up on Payments – A few lenders will allow you to double up on payments, and the extra payment goes directly in the principle. If you double up once a year, you have just achieved the benefits of the accelerated weekly or accelerated bi-weekly payments. Some lenders allow you to skip a payment if you have made a double payment previously. This defeats the purpose, but tough times do arise and it can be a beneficial feature to have.

Whichever the combination of prepayment features, it is important as a mortgage borrower to understand how the features work.  Understanding how they work, will give you the mortgage holder the power to take advantage of them and save money over the life of the mortgage.  The benefit allows borrowers to pay off their mortgage faster and reduce interest costs.

Often time mortgage shoppers are only looking at rates and overlooking the interest savings of prepayment options. That is why it is important to have a mortgage broker make some recommendations for your specific needs. Not only can we find you the lowest rates, we also get you the features that will work to better position you to save money over the long term!