Prepayment questions

Leveraging, renting vs owning, making an investment or buying a home?
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queerasmoi
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Prepayment questions

Post by queerasmoi »

I'm mulling over what it might look like if I were to get a condo and have extra money to dump into the mortgage.

I see most mortgage types have prepayment privileges of a X% increase in payments and a Y% annual lump sum. The way my monthly budget typically works right now, I pay rent and expenses and have quite a bit left over so I put it into savings. I figure if I had a mortgage, I'd dump most of the leftover into prepayments except on months where I actually do spend my spare money on large expenses/purchases.

1) Can you cumulatively increase payments by X% every year?
2) Can you always decide to cancel the increased payments and go back to your original amount?
3) Would the lump sum privileges typically allow you to throw money at the mortgage as many times as you want per year up to the max?
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Pickles
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Re: Prepayment questions

Post by Pickles »

queerasmoi wrote: 25 Nov 2017 23:15 I'm mulling over what it might look like if I were to get a condo and have extra money to dump into the mortgage.

I see most mortgage types have prepayment privileges of a X% increase in payments and a Y% annual lump sum. The way my monthly budget typically works right now, I pay rent and expenses and have quite a bit left over so I put it into savings. I figure if I had a mortgage, I'd dump most of the leftover into prepayments except on months where I actually do spend my spare money on large expenses/purchases.

1) Can you cumulatively increase payments by X% every year?
2) Can you always decide to cancel the increased payments and go back to your original amount?
3) Would the lump sum privileges typically allow you to throw money at the mortgage as many times as you want per year up to the max?
1, 2, and 3. Depends on wording of the mortgage agreement.

2. The way to ensure this: For my first ever mortgage, I borrowed at an amortization rate of 25 years. That was stipulated in my contract. I increased my monthly payments by the 15% allowed by the terms of my mortgage (1994) which, in effect reduced my amortization period to 20 years. Had I run into financial problems, I could have reduced my payments to the 25 year amortization level.

My extra lump sum payments (10% or 15% of the mortgage remaining -- I can't remember which) for three years chopped off a huge chunk of debt. I would have paid the mortgage off in 10 years had I continued. Interest rates for a first mortgage were around 6% back then but housing was cheaper. I paid $121,000 for my first house in Toronto (power of sale) so you can see that a lump sum payment went a longer way in those days than it would today.

My advice, though, is not to buy a condo in Toronto. Most are poorly built and do not foster the kind of community that has people respecting and looking out for their neighbours. Also, I still believe there will be a correction to condo prices. Soon. I am thinking of moving from my house to a condo or apartment. My research is that apartments in an older, well-maintained building are cheaper, bigger, and better built. Condo fees rise exponentially in after the building is fully occupied. I've seen buildings with $700 maintenance fees (this is after your mortgage payments, hydro, and taxes). My advice is to continue to rent for another year or two.

If you decide to buy a condo or a house, have a chat with your boss first. Ask if there is any reason the boss can think of why you shouldn't buy a home. If the boss knows the company is in financial difficulty or your next job evaluation might be negative, he/she should give you an inkling. I did this when I bought my first house; I needed to know there was no issue I was not privy to which might affect my ability to maintain payments.
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Re: Prepayment questions

Post by twa2w »

queerasmoi wrote: 25 Nov 2017 23:15 I'm mulling over what it might look like if I were to get a condo and have extra money to dump into the mortgage.

I see most mortgage types have prepayment privileges of a X% increase in payments and a Y% annual lump sum. The way my monthly budget typically works right now, I pay rent and expenses and have quite a bit left over so I put it into savings. I figure if I had a mortgage, I'd dump most of the leftover into prepayments except on months where I actually do spend my spare money on large expenses/purchases.

1) Can you cumulatively increase payments by X% every year?
Yes, most mortgages with this clause will allow you, once per year to increase future payments by up to the specified amount.
Some will do this by mortgage year, that is anniversary date to anniversay date, some will be 1 time per calendar year, and some you have to wait a year from the last time you did it.
The effect is cummulative. If you can increase up to 20% per year, it will be 20% of whatever your payment is at time of increase. So pymt of 1000 increase to 1200, next increase 1200+20%=1440 and so on
2) Can you always decide to cancel the increased payments and go back to your original amount?
usually, yes you can
3) Would the lump sum privileges typically allow you to throw money at the mortgage as many times as you want per year up to the max?
Not usually. Most contracts state that once per year you are allowed a prepayment of up to Xx% of your mortgage balance. Some companies mean a % of your current balance and some mean Xx% of your original mortgage amount. Some companies do allow you to make multiple prepymts to a max of Xx% but these are rare.
And again the definition of what a year is varies as noted above.

There are two banks that allow % annual prepayment, plus % annual increase in payments, plus the opportunity to pay between $100 and the amount of your monthly payment extra in any month on your mortgage and in as many months as you want. This essentially allows you to double your mortgage payment each month on top of the other prepayment options.

So pickles is absolutely right. It will depend on your contract, and the details can make a difference in how you do this and how quickly you can pay it down -assuming you have the cash.
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Re: Prepayment questions

Post by pmj »

Dunno about other banks, but BNS calculates bi-weekly payments as half of the "true" monthly payment. This has a similar effect to Pickles' method, ie reducing a 25-year amortization to about 20 years. The permitted 15% increase would then be on top of this "bonus". And thus the cushion for reducing the payment would be larger.
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Re: Prepayment questions

Post by gobsmack »

Wouldn't there always be an opportunity for a lump-sum payment when it is time to refinance/renew the mortgage (i.e., in between contracts)?
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Re: Prepayment questions

Post by AltaRed »

gobsmack wrote: 26 Nov 2017 11:01 Wouldn't there always be an opportunity for a lump-sum payment when it is time to refinance/renew the mortgage (i.e., in between contracts)?
Always (to my knowledge), but that was not the question. The question was flexibility within term.
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Re: Prepayment questions

Post by Descartes »

It has been a long time since I've had a mortgage but the way it was in the past:

1. a payment is composed of interest and principal and early in your amortization period you are paying mostly interest in your payments
2. Increasing your monthly/biweekly payment amount or frequency means still paying interest
3. Lump sum payments however are directly off the principal; i.e. no interest

If this still holds true then do the math:
likely saving up your funds for lump sum payments is far more efficient than front-loading monthly/biweekly "mostly-interest" payments.

When I had a mortgage, the terms permitted annual lump sum payments of any amount.
I paid it off in 6 years.
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Re: Prepayment questions

Post by adrian2 »

Descartes wrote: 26 Nov 2017 12:33 1. a payment is composed of interest and principal and early in your amortization period you are paying mostly interest in your payments
2. Increasing your monthly/biweekly payment amount or frequency means still paying interest
3. Lump sum payments however are directly off the principal; i.e. no interest

If this still holds true then do the math:
likely saving up your funds for lump sum payments is far more efficient than front-loading monthly/biweekly "mostly-interest" payments.
I don't think so. Any increase in the regular payment account goes fully against principal.

In other words, paying $1k extra monthly is slightly better than waiting 12 months to make a $12k lump sum payment.
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Re: Prepayment questions

Post by queerasmoi »

All useful to know, thanks. Regarding the job security, good idea. Now that I've shifted to working in IT though, my confidence in being able to find another job should this one fall through is much higher.

Yeah I'm iffy about prices and such. I have enough for a decent down payment, and the parents have offered to top that up because they did the same for my older sister. In case of total catastrophe (e.g. if I lost my job, couldn't get hired again, *and* was underwater all at once) I'd have their support.
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Re: Prepayment questions

Post by Quebec »

queerasmoi wrote: 25 Nov 2017 23:15 I'm mulling over what it might look like if I were to get a condo and have extra money to dump into the mortgage.
As you probably know, you can quickly find the best advertised mortgage rates on sites like RateHub. There is a column in the table for prepayment options, which vary quite a bit by lender (e.g. 15% to 100% regular).

Because you intend to make aggressive prepayments, it might be worthwhile to talk to a mortgage broker to get some advice. It may be that the second cheapest lender has much more favorable prepayment terms than the absolute cheapest, for example.

In terms of making multiple prepayments per year, I've been able to that with both CIBC (2007-2012) and BMO (2012-today). Recently I've been able to do prepayments online, without a phone call (I have a BMO chequing account). Have a thousand dollars to spare: just put it on the mortgage, the transaction takes one minute...
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Re: Prepayment questions

Post by queerasmoi »

Good to know, thanks.

Maybe moderately aggressive. I would not have enough spare cash to, say, max out a 10% lump sum prepayment privilege. At least not at my current salary.
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Re: Prepayment questions

Post by pmj »

EG at BNS, I can prepay online, and the max for the present year is stated. AFAIK, I could pay any amount I wanted.
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Re: Prepayment questions

Post by Spudd »

Same at TD for lump sums. My friend had a mortgage with RBC and they only allowed one lump per year. If you lumped less than the max and then found more money later, tough cookies.
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Re: Prepayment questions

Post by Pickles »

Spudd wrote: 27 Nov 2017 14:38 Same at TD for lump sums. My friend had a mortgage with RBC and they only allowed one lump per year. If you lumped less than the max and then found more money later, tough cookies.
I got around that problems, one year, at BMO where I had a HELOC in addition to my mortgage. I had money coming in the new year but had to make my lump sum contribution by Dec 31 of the current year. I made my contribution on the last business day of the year, borrowing from the HELOC and paid it off three weeks later when I received the expected money. The amount of interest I paid was peanuts compared to the amout of mortgage interest I avoided.
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Re: Prepayment questions

Post by twa2w »

Spudd wrote: 27 Nov 2017 14:38 Same at TD for lump sums. My friend had a mortgage with RBC and they only allowed one lump per year. If you lumped less than the max and then found more money later, tough cookies.
Well not quite.

RBC is one of the banks that allows double up payments. Your friend could have doubled up his pymts until he had used the extra money.
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Re: Prepayment questions

Post by pmj »

I suspect that not every mortgage at any given FI would have the exact same conditions ... in which case everyone's experiences (including mine) are just anecdotes ...
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Re: Prepayment questions

Post by Quebec »

Hopefully useful anecdotes!
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