Thanks for this breakdown. I found this calculator/ and was able to get a clearer idea of what you where saying. Your post makes it even more clear. By just doing prepayment and accelerated biweekly will knock it from 25 years down to 18.Dynatos wrote: ↑Most lenders will allow you to increase your regular payments by a certain percentage as well as pay a certain percentage of your initial principal in one annual lump sum. Most often, the condition offered is 20/20, which means you can increase your regular payment by up to 20% and pay off up to 20% of your initial principal every year without penalty.
Your regularly scheduled payments are based on an amortization formula. Every payment pays a certain amount to interest and a certain amount to principal. The amount of interest per payment decreases, and the amount of principal paid off increases, as you pay off the principal. Every payment made in addition to your regularly scheduled payment goes directly towards the principal, thereby reducing the interest paid on subsequent payments.
So, the math, without actually showing the amortization calculations. I used my own Excel based calculator for ease.
Scenario 1Scenario 2
- A $300,000 mortgage at 2.64% over 10 years results in a $2,845 monthly payment.
So, by amortizing over 25 years, increasing your regular payments, and adding an annual lump sum, you'll still pay the mortgage off in 10 years. In fact, if you had a wealth of cash sitting around, you could conceivably pay the 25-year mortgage of in under 4 years with no penalties.
- A $300,000 mortgage at 2.64% over 25 years results in a $1,365 payment. A 20% increase in your regular payment will remove 5 years from your mortgage.
- If your mortgage conditions allow a 20% increase to your regularly scheduled payment and you take advantage, your monthly payment becomes 1.2*$1365 = $1,638.
- The difference between the 10 year amortization and this increased payment is $2845 - $1638 = $1,210 per month. Over the course of the year, this is 12*$1207 = $14,484. If you then pay an annual lump sum of $14,484 every year for 10 years, you'll knock your mortgage down to 10 years. Simply take the difference ($1,210/month) and put it aside in account. Then, once a year, put that against your mortgage.
- Your monthly payment averages out to $1638 + $14484/12 = $2,845/month, the same as the 10 year amortization
Then, if the unforeseen happens (job loss, marriage, kids, etc.), you can decrease your monthly payment back to the contractual minimum of $1,365. You also have $1,210/month that you've been saving towards your lump sum payments that you can use in case of emergency. Furthermore, if the interest rate increases, you have some float to be able to offset that interest rate increase by keeping your payments constant, which will slightly increase your amortization.
Let's use your specific situation as an example for more illustration.
- $250,000 house
- $100,000 down payment
- $150,000 mortgage
You can get a variable rate mortgage as low as prime-0.65 (i.e. 2.05%).
- At 10 years amortization, your monthly payment is $1383.56
- At 25 years amortization, your monthly payment is $639.44
- Increases your payments by 20% ($127.88) = $767.33. Your mortgage drops to 19.92 years.
- Put aside $1383.56-$767.33 = $616.23/month in a savings account. At the end of the year (month 12), put the total 12*$616.23 = $7,394.76 against the mortgage. Your mortgage now drops to 122 months.
- Say you end up having financial hardship in 5 years. At year 5, the outstanding balance is $79,202.10. You've already paid off almost half the mortgage. Decreasing to the bare minimum at this point will mean you only have 10 years left to pay off.
It all comes down to your financial situation, where you see your financial situation in the future, what risk you're willing to take and, more importantly, how disciplined you are with your finances. Taking advantage of prepayment conditions really requires discipline. For many people, it would just be easier to amortize at 10 years and forget about it but, with financial discipline, you can buffer a lot of risk.
I am pretty disciplined so I probably will go with method as I rather have a safety net as I like to prepare for the worst. This gives me the flexibility of having best of both worlds.
I think I might go to my main bank, maybe with CdnRealEstateGuy and one other to get some pre approvals and then once I am about to buy do a blitz and go to many and see if I can get a better rate?
Or do you think it is over kill going to like 3 for pre approvals?