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Mortgage payments - Very specific question ...

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[OP]
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Mortgage payments - Very specific question ...

I've tried to simplify this as much as possible.

Let's say your monthly mortgage payments amount to $1k per month @ 30 year amortization.

You are allowed to: (1) double up on monthly mortgage payments, (2) pay up to 15% lump sum that can be done at any time during the year and as many times as you want as long its below the 15% and within the year. All other variables will be held constant. Note that the any money towards the lump sum goes directly to paying off your principal.

Scenario 1:
- Put $1k per month towards the mortgage payment (which is the minimum requirement)
- Put $1k per month into your lump sum allowance

Scenario 2:
- Put $2k per month towards the mortgage payment (doubling up on monthly mortgage)
- Put $0 per month into your lump sum allowance


Which way is better?
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Feb 4, 2008
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The sooner you make payments the lower the balance. The lower the balance the lower the interest bring charged. Always pay sooner as apposed to later.
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[OP]
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sslinn wrote: The sooner you make payments the lower the balance. The lower the balance the lower the interest bring charged. Always pay sooner as apposed to later.
So is your answer Scenario #1 or #2?
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Jul 23, 2011
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Lindsay
scenario 2 for sure...you will save significantly more interest over the life of the mortgage and pay it off sooner....no brainer
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johnsazzr wrote: scenario 2 for sure...you will save significantly more interest over the life of the mortgage and pay it off sooner....no brainer
Is that because the money going into the lump sum doesn't get applied to the principal until the end of the year (not sure if that's how it works)? Can you provide details on why it is better? Not a 'no brainer' to me :)
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Greely
flatblack wrote: Is that because the money going into the lump sum doesn't get applied to the principal until the end of the year (not sure if that's how it works)? Can you provide details on why it is better? Not a 'no brainer' to me :)
Because you'll be lowering your principal every month, thus lowering your interest.
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steve-0101 wrote: Because you'll be lowering your principal every month, thus lowering your interest.
But, doesn't putting that same amount into your lump sum contribution do the same? All of that amount goes directly to reducing the principal. Wouldn't that be better?
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GTA
From your question, I am understanding correctly - no matter which option you pick, you are planning to pay $2,000 EVERY MONTH?

Lump sum payments go directly to the principal. I think doubling up does as well (it did at my lender when I had that option).

As long as you will be paying the same amount monthly (and not making a lump sum payment less often) AND both options go directly toward the principal, both options are exactly the same in your scenario.
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Oops, edited. Should have read your post carefully.

I didn't know doubling up goes to your principal.
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flatblack wrote: Oops, edited. Should have read your post carefully.

I didn't know doubling up goes to your principal.
You'd better check if it does with your bank. If it does then the result will be the same with 1 or 2. If it doesn't then senerio #1 is better.
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Mar 17, 2007
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As far as I know both scenarios are the same as long as the extra $1K is paid on the same day. By using the double up option you would still have room for 15% that can be used throughout the year. By using scenario 1 you eat up into your lump sum percentage allotted for the year.
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Aug 17, 2015
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#2 is better, but make sure that the bank approves that structure as your income has to support it with debt to service ratio (TDS).
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Scenario #2 is better as when you double up your payment, the extra $1000 is applied immediately to your mortgage principal. This reduces your mortgage balance right away and you save interest right away. As interest on your mortgage is usually compounded semi-monthly, the sooner you make a payment the more that you save.

Scenario #1 has you putting $1000 a month into a lump sum payment. A lump sum payment can only be made once. You cannot make a payment every month when making a lump sum payment. This means that you would have to save the $1000 every month and make a $12,000 lump sum payment at the end of the year.

Here's an example. Saw your mortgage is $245,450. You have a 5-year fixed rate closed mortgage at 2.75%. A 30-year amortization will result in a monthly mortgage payment of $1000.

With Scenario #2, your mortgage balance at the end of the term will be $152,932.46. With Scenario #1, your mortgage balance at the end of the term will be $153,733.26, or $800.80 more. You save $800 making your extra payment as soon as you can rather than waiting 12 months to make a lump sum payment.
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cbr663 wrote: Scenario #2 is better as when you double up your payment, the extra $1000 is applied immediately to your mortgage principal. This reduces your mortgage balance right away and you save interest right away. As interest on your mortgage is usually compounded semi-monthly, the sooner you make a payment the more that you save.

Scenario #1 has you putting $1000 a month into a lump sum payment. A lump sum payment can only be made once. You cannot make a payment every month when making a lump sum payment. This means that you would have to save the $1000 every month and make a $12,000 lump sum payment at the end of the year.

Here's an example. Saw your mortgage is $245,450. You have a 5-year fixed rate closed mortgage at 2.75%. A 30-year amortization will result in a monthly mortgage payment of $1000.

With Scenario #2, your mortgage balance at the end of the term will be $152,932.46. With Scenario #1, your mortgage balance at the end of the term will be $153,733.26, or $800.80 more. You save $800 making your extra payment as soon as you can rather than waiting 12 months to make a lump sum payment.
Not always true - I can make as many lump sum payments as I like throughout the year, as long as they don't exceed 10% total.
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cbr663 wrote: Scenario #1 has you putting $1000 a month into a lump sum payment. A lump sum payment can only be made once. You cannot make a payment every month when making a lump sum payment. This means that you would have to save the $1000 every month and make a $12,000 lump sum payment at the end of the year.
Some mortgages only allow one lump sum payment, but not always and not in the OP's case.
flatblack wrote: You are allowed to: (1) double up on monthly mortgage payments, (2) pay up to 15% lump sum that can be done at any time during the year and as many times as you want as long its below the 15% and within the year. All other variables will be held constant. Note that the any money towards the lump sum goes directly to paying off your principal.
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[OP]
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I think I found the answer ...

I grabbed this from the TD help site (btw, the mortgage is with TD): "With both regular payment increases and lump sum payments, your total payment increase will apply to the principal portion. In your example, the payment would apply like this:
- Regular payment = $1,000 ($600 principal and $400 interest)
- Increased payment = $2,000 ($1,600 principal and $400 interest)." <= This is for TD only, other banks may have different rules.

Plus, I am allowed to contribute as many times as I want into my "lump sum". I could contribute $10 per day into my lump sum if I logistically this was possible. Now whether that $10 is applied to the principal on the day or the end of the month is another question.

This would mean Scenario #1 = Scenario #2 for the case of TD.

Before making this thread, I didn't know that the extra money on top of the monthly mortgage payments goes directly to principal.

I guess I'll be doubling up and contributing towards the 15% as soon as extra cash becomes available (if my goal were to pay off my mortgage as quickly as possible and I didn't care about investing).
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REMAXREALT0R wrote: #2 is better, but make sure that the bank approves that structure as your income has to support it with debt to service ratio (TDS).
The mortgage is approved as long as the GDS and TDS ratios are fine. OP would have the 15% lump sum and doubling up as part of the mortgage agreement. The bank does not have to approve #1 or #2 as it is already part of their signed contract.
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[OP]
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dougboswell wrote: ...The bank does not have to approve #1 or #2 as it is already part of their signed contract.
Yup that's correct.
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steve-0101 wrote: Not always true - I can make as many lump sum payments as I like throughout the year, as long as they don't exceed 10% total.
Some mortgages only allow one lump sum payment, but not always and not in the OP's case.
Sorry, my mistake. I went back and re-read the original post and the OP can make additional multiple payments. Thanks for pointing that out. I got caught up on the use of "lump", which usually refers to one time.

In that case, both scenarios are the same. In this case the timing of the pmts are the same so the savings are the same.

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