What happens if you inherit some money after the passing of a distant relative? What happens if you receive a pay raise at your job? What happens if you win a handsome sum from the lottery or high-stakes poker? Typically, the fiscally responsible thing to do would be to use this extra cash to put toward your fixed- or variable-rate mortgage. While it might depend on the mortgage lender, many mortgage agreements contain pre-payment privileges. But what are pre-payment privileges? 

Pre-payment privileges provide homeowners with the flexibility and ability to make additional payments towards their mortgage principal, reducing the outstanding balance. By doing so, homeowners can potentially save thousands of dollars in interest payments over the mortgage amortization period.  

There are three benefits associated with pre-payment privileges: 

  • Flexibility: Pre-payment privileges will let homeowners manage their mortgage how they want, based on their monetary capabilities. 
  • Interest Savings: In today’s rising-rate climate, you want to do anything you can to save on your interest payments over the mortgage term, putting thousands of dollars back into your pocket. 
  • Shorter Mortgage Terms: Exploiting pre-payment privileges shortens the mortgage term by reducing the principal balance, giving you your residential property in a shorter span. 

So, what are the pre-payment privileges anyway? Let’s take a deeper dive into this debt-free goal. 

Types of Pre-Payment Privileges

Here are four types of pre-payment privileges: 

#1 Lump Sum Payments 

Lump sum payments are additional payments you can make that extend beyond your regular mortgage instalments. Lump sum payments can serve as fixed amounts or percentages of the principal mortgage amount. Of course, it all depends on the terms of the mortgage agreement. The goal behind this strategy is for borrowers to reduce their original mortgage amount and trim the overall interest payment. 

There are four ways to execute lump sum payments: 

  • Before the end of your term. 
  • At the end of your term. 
  • On specific dates listed in your contract. 
  • During certain times throughout the life of your mortgage term. 

#2 Increasing Regular Payments 

Can you afford to increase your regular mortgage payments? If so, you should do so. That said, when you are thinking about opting for higher payments, which can accelerate your plan to pay off your mortgage faster and save on interest costs, you will need to speak with a mortgage specialist and determine if it is permitted. So, in the end, giving your bi-weekly or monthly payments a boost can allow you to become mortgage-free faster. 

#3 Double-Up Payments 

No, we are not talking about a Double-Double from Tim Hortons. We are talking about a double-up. Double-up payments enable borrowers to complete additional payments equal to their regular mortgage payments. Some banks do not offer this feature, but some other lenders will extend this opportunity once a year, allowing homeowners to decrease their mortgage faster and save on interest. If you receive a bonus, a pay hike, or any other extra money on a regular basis, it is a worthwhile pursuit. 

#4 Accelerated Options 

Accelerated payment options let borrowers make weekly or bi-weekly payments. This technique allows homeowners to allocate more money toward the mortgage than with a monthly payment and save on interest charges. Put simply, by accelerating your mortgage payments; you will complete the equivalent of one more monthly payment per year. 

Be Warned 

Indeed, pre-payment privileges offer notable advantages to borrowers. At the same time, awareness of any related financial penalties is critical. Some mortgage lenders might slap penalties for pre-payment, particularly if the transaction occurs during a restricted period or if borrowers surpass specified limits. Ultimately, it would be best if you spoke with a mortgage specialist at your bank to make an informed decision about taking advantage of pre-payment privileges. 

Pre-payment Privileges Are a Valuable Tool for Homeowners

Pre-payment privileges are worthy features of mortgage agreements in the Canadian real estate market. 

These tools allow homeowners to pay off their mortgages sooner and save on interest payments. From lump sum payments to higher regular payments to double-up transactions, borrowers can achieve debt-free homeownership at a much faster pace since they are trimming their principal balance. Of course, every financial expert and industry leader will purport that it is essential for homeowners to understand the terms and potential penalties associated with pre-payment privileges to make informed decisions and maximize their financial benefits.  

With the right strategy and knowledge, pre-payment privileges can be a powerful instrument in your toolbox for achieving long-term financial security in the nation’s housing sector.