HOW TO USE PREPAYMENTS TO BE MORTGAGE FREE

1. Know your prepayment privileges
Most mortgages include allowances for you to use prepayments to pay down your mortgage faster.  The standard prepayment amount allowed per payment can vary depending on your mortgage provider.  Your mortgage provider may also be able to increase and decrease your prepayment privilege at any time throughout the life of your mortgage. 

This means that if any life event occurs and you need to reduce your payment to the minimum, you can do so easily.  Most mortgage providers allow this free of charge, but with some providers you can only change your payments a set number of times each calendar year.

2. Increase your payments
When you increase your payments, the excess you pay per payment goes directly onto the principal portion of your mortgage.  This is an easy way to drastically reduce the interest you will pay over the long term.Common lender prepayments allow you to add an additional 10% to 20% to each payment.  Some lenders also allow the use of “double-up payments”, which let you double each payment – the extra of course going against your principal.

Prepayments being used on a typical mortgage:

All calculations are based off of a $400,000 mortgage with a 5 year term and 25 year amortization at a rate of 3.39% with monthly payments.

No Prepayments:
Monthly payments: $1,973.93
Principal paid over 5 year term: $55,578.21
Interest paid over 5 year term: $62,857.59
Mortgage amount remaining: $344,421.79
Years remaining on mortgage after 5 years: 20 Years

Adding a 20% Prepayment:
Monthly payments: $2,368.72
Principal paid over 5 year term: $81,336.55
Interest paid over 5 year term: $60,786.65
Mortgage amount remaining: $318,663.45           
Years remaining on mortgage after 5 years: 14 years & 2 months
As you can see in the example, the mortgage was reduced by $25,758.34, saving $2,070.94 in interest!The mortgage term was reduced an extra 5 years and 10 months – just within the 5-year term!

3. Make a lump sum prepayment
Making a large prepayment can be a great option for paying down your mortgage faster, but may not be ideal for everyone. Lump sum payments help you reduce the amount of interest you will be required to pay on your mortgage. Lump sums can also be used to reduce your mortgage amount before selling your home and will reduce the penalty you may be required to pay. 

Lump sum payments can be made annually, and are usually 10% to 25% of the total mortgage amount, based on the amount funded. Typically, you can make a lump sum payment once a year, but every mortgage provider has specific guidelines for how you can make a lump sum payment.  For example, your provider may require you put down a minimum amount for a lump sum prepayment, or you may only be eligible for one on the anniversary date of your mortgage.  
There are a variety of ways to make prepayments, but in all there is one clear benefit: achieving mortgage freedom sooner!