How to shop for a mortgage – Part 2 (Prepayment Options)

This is our first video in our series on what you need to look for when shopping for a mortgage & we’re going to talk about prepayment privileges.  repayment privileges are your tools to become mortgage free faster.  When you buy your home, you do not want to be paying it off for the next 25 or 30 years.

With every mortgage, you have the ability to make more than your required minimum monthly payment.  This goes directly to principal & can go a long way in shaving years off that mortgage & the amount of interest you will pay over the life of that mortgage.
The standard prepayment options you want to make sure you have are:

-15% Increase payment: this means increasing your monthly payment by up to 15%.
EXAMPLE: if your regular payment is $1000 / month, you could increase up to $1150 / month in year 1.  In year 2, you could increase to 15% above that.

-15% lump sum payment: this refers to putting a large deposit on your mortgage.
EXAMPLE: if you have a $200K mortgage, you could put up to $30K in lump sum payments per year.

-double up payments: on any payment date, paying up to double that amount.
EXAMPLE: $1000 / month payment.  You could pay up to $2000 as a one-off payment.

Now these options are not mutually exclusive.  You could really utilize all 3 if you wanted to & really, you should use all three.  The thing you want to watch out for, is that some lenders will offer you a “low rate” mortgage, where they give you a discounted rate, but slash your prepayment options to 5%/5%, or 10%/10%.  Don’t be fooled, it’s not necessary to sacrifice your prepayments to get a low rate.

The other thing you want to watch for is some banks will only allow you to make prepayments on the mortgage anniversary, once / year.  I can’t stress enough how much of a pain in the butt this is.  For 365 days a year you have a plan how much you’re going to put down on your mortgage.  If you end up putting too much or not enough, you have to live with that decision for the next 365 days.  It’s far more convenient to make a $1000 lump sum payment every 3 months, than it is to plan for a $4000 lump sum once per year.

So the important thing with prepayments are 15% / 15% / Double up & you want to make sure you can make those prepayments throughout the year, not just on the anniversary.

Ryan Zupan
Mortgage Planner
[email protected]
604.250.6122

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