Mortgage Smart Tip for Canadian First Time Home Buyers – Pre-Payment Privileges

Buying your first home can be a daunting process including figuring out the right mortgage and options for you.  One part of this is knowing about what Pre-Payment Privileges to select.  Here let’s talk about its definition and what it really means, the options available and how do you choose the right one for you?

Definition:  The ability to prepay all or a portion of the principal balance with NO penalty or charge, subject to conditions (no default, subject to lenders terms)

Options:

       Increase Regular Payment: There are often a number of options available all ranging from 0% to 25%+:

ü  Increase your regular mortgage payment by a certain % of the payment

ü  Double your regular mortgage payment

ü  Skip a payment

       Lump Sum: Pay a lump sum that doesn’t exceed a certain % of your original mortgage amount

       Complete Repayment: With an open mortgage you could pay the entire amount off in full with no penalty

So how do you decide when to make extra payments?

       Make sure you can afford to pay extra – think of any future changes in income or expenses you may have (maternity leave, new car, etc.)

       Remember, when you pay extra on your mortgage you cannot get it back unless you refinance or its linked to a re-advanceable line of credit or mortgage

       Consider aligning your extra payments and the amount with say a yearly bonus or tax refund

       The more you pay off your mortgage, the less interest you will pay

       Increase your payment up, or down if allowed by the lender, so that the monthly payment is within your personal budget, although some lenders don’t allow you to drop it down later!

       If your interest rate is low on your mortgage, consider taking any extra money you have to build some savings; TFSA, RESP’s, RRSP’s – especially if contributing to these creates an income tax refund and then use that to pay off the mortgage!

My recommendation:  Pay what you can afford and if it makes sense - paying your mortgage off sooner you will reduce your debt and save unnecessary interest – a forced savings plan for the future!