Personal Finance

Is there any difference between lump sum and ongoing increased mortgage payments

  • Last Updated:
  • Jul 10th, 2020 3:03 pm
[OP]
Sr. Member
Oct 11, 2010
964 posts
305 upvotes
Charlottetown

Is there any difference between lump sum and ongoing increased mortgage payments

I have a variable rate mortgage which luckily I re-negotiated pre-covid @ prime -1. My current interest rate is 1.45%. I'm already paying my mortgage weekly and have bumped up payment amount. I'm wondering, if I had say 5-10k to put down is the best strategy to do it in a lump sum or by increasing the weekly payment?

Yes, I know some people will say don't pay your mortgage faster and do X instead, but not interested in hearing that debate.
12 replies
Member
Jan 31, 2007
298 posts
25 upvotes
Montréal, QC
Given your position on not wanting to do anything else with your money, I would do a lump sum in your case, provided that your mortgage allows you to do so. You will save on the interest right away.
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Apr 21, 2009
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Grimsby
I was always under the impression that lump sum payments essentially wipe out principle from the end of the amortization schedule.

And if you know that you'll have additional recurring funds that you want to put towards the mortgage, it would be beneficial to increase your payments to take advantage of the additional funds, as opposed to do recurring lump sum payments. This is how it was explained to me at one point - if anyone knows exactly please clarify or correct me if needed.

Though if its a one time 5-10K you have saved up and you want to put it toward the mortgage, I don't think its a big deal to do a lump sum payment.
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May 16, 2017
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Without knowing the exact terms of your mortgage it is hard to say exactly. But, when it comes to most bang for the buck, because of cumulative interest, the quicker you pay down by the largest amount possible the principal the less you will pay overall. In other words, if you pay $10k towards the principal in one lump now - as opposed to adding $10k total in extra payments over the next year, the former will be better.

That said, perhaps you can make more by investing the $10K and getting a better return than paying down a 1.45% mortgage. Depends on whether you want a sure thing with the mortgage pay down or a bit more risk in an investment.
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May 16, 2017
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joey003 wrote: I was always under the impression that lump sum payments essentially wipe out principle from the end of the amortization schedule.

...
Lump sum payments reduce the PRINCIPAL at the time of payment and if future payments are otherwise left the same - the amortization schedule will effectively be SHORTENED because less principal remains to be paid. In addition, because the interest portion of the payment is proportionally lower - the remaining principal is also paid off more quickly further reducing the effective amortization period.
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Apr 21, 2009
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Grimsby
robsaw wrote: Lump sum payments reduce the PRINCIPAL at the time of payment and if future payments are otherwise left the same - the amortization schedule will effectively be SHORTENED because less principal remains to be paid. In addition, because the interest portion of the payment is proportionally lower - the remaining principal is also paid off more quickly further reducing the effective amortization period.
Thanks for the clarification!
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Nov 13, 2013
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Ottawa
robsaw wrote: Lump sum payments reduce the PRINCIPAL at the time of payment and if future payments are otherwise left the same - the amortization schedule will effectively be SHORTENED because less principal remains to be paid. In addition, because the interest portion of the payment is proportionally lower - the remaining principal is also paid off more quickly further reducing the effective amortization period.
Yes, but my understanding in Canada interest is calculated semi annually so you won’t save interest until your anniversary or half anniversary date.
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Mar 10, 2010
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fogetmylogin wrote: Yes, but my understanding in Canada interest is calculated semi annually so you won’t save interest until your anniversary or half anniversary date.
I always thought that was supposed to be how mortgages operated in Canada too. But over the 3 different mortgage lenders I've had it has never worked that way, the interest has always directly varied with the rate (when variable went up or down) or the outstanding balance (when a pre-payment is made).

I am curious if any brokers/bankers know when mortgages went to instant changes as I had always heard that interest was only supposed to be done semi-annually. Maybe it just means that all calculations are done using a semi-annual compounding frequency?
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Dec 24, 2007
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fogetmylogin wrote: Yes, but my understanding in Canada interest is calculated semi annually so you won’t save interest until your anniversary or half anniversary date.
Your understanding of interest is incorrect..when the loan says that interest rate is calculated semi-annually, it is the effective (or actual) interest rate that is calculated on semi-annually basis (that is a rate of 10% that is quoted is actually an interest rate of (1+.10/2)^ 2 -1 = 10.25%.) It is not the application of the interest rate on the loan which is calculated on a daily basis using the effective interest rate and it would be immediately applied after the payment.

Why do banks do this? It's been around for years but it's a way to quote a lower interest rate of 10%, when you're really getting a rate of 10.25%. It is also mandated by law for consistency.
Last edited by WetCoastGuy on Jul 10th, 2020 1:09 pm, edited 2 times in total.
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Nov 13, 2013
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Clacker wrote: I always thought that was supposed to be how mortgages operated in Canada too. But over the 3 different mortgage lenders I've had it has never worked that way, the interest has always directly varied with the rate (when variable went up or down) or the outstanding balance (when a pre-payment is made).

I am curious if any brokers/bankers know when mortgages went to instant changes as I had always heard that interest was only supposed to be done semi-annually. Maybe it just means that all calculations are done using a semi-annual compounding frequency?
I was talking about compounding not the changes. Changes can be done at anytime on any product I have seen in Canada.
WetCoastGuy wrote: Your understanding of interest is incorrect..when the loan says that interest rate is calculated semi-annually, it is the effective (or actual) interest rate that is calculated on semi-annually basis (that is a rate of 10% that is quoted on actually an interest rate of (1+.10/2)^ 2 -1 = 10.25%.) It is not the application of the interest rate on the loan which is calculated on a daily basis using the effective interest rate and it would be immediately applied after the payment.

Why do banks do this? It's been around for years but it's a way to quote a lower interest rate of 10%, when you're really getting a rate of 10.25%.
This is good to know. I asked a few bankers and they had no idea what I was talking about and couldn't answer definitely. Thanks!
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Mar 10, 2010
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fogetmylogin wrote: I was talking about compounding not the changes. Changes can be done at anytime on any product I have seen in Canada.
Agreed, that's what I was talking about too. But Westcoast's explanation of where that semi-annually misunderstanding comes in clarifies it.
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Sep 19, 2013
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WetCoastGuy wrote: Your understanding of interest is incorrect..when the loan says that interest rate is calculated semi-annually, it is the effective (or actual) interest rate that is calculated on semi-annually basis (that is a rate of 10% that is quoted is actually an interest rate of (1+.10/2)^ 2 -1 = 10.25%.) It is not the application of the interest rate on the loan which is calculated on a daily basis using the effective interest rate and it would be immediately applied after the payment.

Why do banks do this? It's been around for years but it's a way to quote a lower interest rate of 10%, when you're really getting a rate of 10.25%. It is also mandated by law for consistency.
This. The rate that you see is a nominal rate used for conversation purposes.

To answer OP's question, if the objective is to pay minimum interest, then you should get rid of the money asap. So lumpsum payment for the money that you have. And then for the money that you'll get with every salary, schedule increased payment so that it does not accumulate. Make sure you plan for contingencies, surprises and have some emergency money.
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Deal Addict
Jan 1, 2013
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Durham
Do both. Prepayment work both ways, you can increase your payments 15-20% AND do lump some as well. But you would want to max out your weekly first

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