22 Nov Prepayment privileges
How are prepayment privileges calculated? A mortgage prepayment privilege gives you the choice to increase your monthly mortgage payments before it is due and without a penalty. The extra amount is applied to the principal. If you are under this type of privilege, you can avoid penalties. This type of privilege usually comes with an open mortgage. Other types of mortgages may have a limited annual prepayment privilege.
For example, you may have a mortgage that states that 10% of the principal can be paid annually without penalty. These mortgages are good for people who have seen an increase in income since the mortgage was issued, and are able to add extra to their mortgage payment each month. Or you may gain access to cash flow you did not anticipate to have throughout the term of your mortgage, such as a bonus or inheritance. They are also good for clients who like to apply an annual lump sum payment to their mortgage, such as a tax refund. Some lenders will accept prepayment privileges as lump sum payments, as a scheduled increase to monthly payments, and as payment double-ups.
In summary, prepayment privileges allow you to pay off a mortgage at a faster rate than the original payment schedule outlined by your lender. For those who do not want, nor have the means to prepay any portion of the principal during the term of the mortgage, they may consider looking at mortgages with limited prepayment privileges. Chances are you will be able to get a better mortgage rate without having to pay for unneeded, larger prepayment privileges.
For more on this, contact us or get a copy of Carmen Costa’s book “The Reality of Mortgages”.