Kathryn Martin of Origins Mortgages has some good advice:
Mortgages come in all shapes and sizes – but there are a lot of similarities between most mortgages. One element you should be aware of is the difference between ‘open’ and ‘closed’ mortgages.
An open mortgage means you can pay any amount onto your mortgage without penalty. A closed mortgage (which is much more common) gives you a lower, competitive interest rate, but you will be limited on how much you can pay back your mortgage. Anything outside of the lender’s rules will be subject to hefty prepayment charges.
But did you know that there’s (usually) multiple ways to pay down a closed mortgage faster? Putting down $1000 could save you over $1000 in interest alone! More on that in a separate article – but for now, here are some ways to pay your mortgage down faster.
1. Accelerate your payments
Every lender will allow accelerated payments, and while some people make accelerated payments sound complicated, the calculation is actually quite easy. Want to see what it is? Here you go:
Accelerated biweekly payments = the semi-monthly payment, applied biweekly.
Accelerated weekly payments = the semi-monthly payment, divided by 2 and applied weekly.
In case you didn’t know, biweekly simply means every two weeks, while semi-monthly means twice a month. So for accelerated biweekly, you actually pay the exact same amount biweekly that you would if you were paying semi-monthly. If your semi-monthly payment is $700, your accelerated biweekly payment would also be $700. The difference is, paying semi-monthly will apply 24 payments a year (12×2), but biweekly applies 26 payments each year. That difference will drastically decrease your interest cost over the long term of your mortgage.
2. Double your payments
Some lenders have the option of doubling your regularly scheduled payment. Of these, there are particular lenders that provide even more flexibility in changing your payment amount (such as paying any extra amount up to your regular amount). This payment option likely provides you with the most flexibility in terms of paying down your mortgage.
But there is a downside to this type of payment – despite being the most flexible, it’s not always the most accessible, or the easiest to use. There is a lot of necessary information that needs to be communicated, such as start and stop dates, and the exact amount you want to pay. This may be the reason that some lenders decide not to offer this option. However, should you be able to learn how to double your payments, your net worth will thank you.
3. Anniversary payments
This option is more available than the doubling of payments, but less available than the accelerated payments. A lot of lenders communicate this option by calling it the 10/10 anniversary payment, or the 20/20.
For example, here’s what they usually mean by 10/10. Once a year, you may:
a) increase your regular payment by 10%, OR
b) make a lump sum payment straight to the principle, up to 10% of the original mortgage.
Each lender may have slight differences on particular rules, but this is the gist. As you may be able to tell, paying 10% of the original mortgage is pretty difficult in most situations, but will do wonders for paying it down sooner.
In conclusion, prepayment options should definitely be something that your broker discusses with you, as well as any other features of your mortgage (such as a skip-payment option). If you don’t have a broker yet, give me a call and I will set you up.