# Prepayments with lower no. of years left on mortgage



## christinad (Apr 30, 2013)

I'm at 8 years on my mortgage right now and wondering if it is worthwhile to continue to make prepayments? It seems there is a lot less interest now and it takes more to get the time off. I'm not sure if there is a cut off point where prepayments aren't worth it.


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## nobleea (Oct 11, 2013)

Prepayments can be considered trimming the back end off the mortgage. Every prepayment will trim XX days or months off the end of your mortgage. Your interest rate should determine whether it's a good idea or not.


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## OptsyEagle (Nov 29, 2009)

christinad said:


> I'm not sure if there is a cut off point where prepayments aren't worth it.


When you decide that you would rather have your mortgage for a longer time then a shorter time. lol

As the last poster indicated, every pre-payment reduces the number of payment required from the last one to the first one. Since it rarely benefits you immediately, many people don't make them. I think it is less then 10% of mortgage holders that make pre-payments.

So the answer to your question lies inside you and in your financial situation. Obviously the interest rate on your mortgage is probably higher then the after tax interest rate you get on your savings, if you have any. If you have an excess amount of savings, pre-payments make a lot of sense.

If you don't have the above, the only other question that comes up is whether you would prefer the material things you can buy with the pre-payment money MORE then the feeling of not having a mortgage, happening sooner then later. Spenders will lean to the former and savers will lean to the latter.

The last thought is whether you can invest the money better then the mortgage rate you are paying. That, unfortuneately can only be a guess and not a guarantee so I will leave the guesses to you. 

Personally I would make the pre-payments. Oh yeah, that's right. I did, and now I owe nothing to no one. How sweet is that? Maybe you will find out soon.


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## AltaRed (Jun 8, 2009)

OptsyEagle said:


> Personally I would make the pre-payments. Oh yeah, that's right. I did, and now I owe nothing to no one. How sweet is that? Maybe you will find out soon.


That is what we did and got rid of the mortgage in 15 years, and that is with upgrading houses* 4 more times in that period..from a duplex in the fall of 1974 to an executive 2 storey along the way. By the time we got to the 5th house in mid-1987, we limited the purchase price of what we bought to a mortgage that could be paid off by mid-1989. Other than an emergency cash fund, we threw every cent we had at the mortgages that we were allowed.

* Had the luxury of corporate transfers every few years where closing costs to buy and sell were covered by the company, and that allowed me to do a step upgrade each time. But the key was we never got into more house (mortgage) each time where we could not maximize pre-payment privileges each and every time. Mortgages are meant to be retired as quickly as possible (recognizing these were generally the years of double digit interest rates as well).


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## pwm (Jan 19, 2012)

AltaRed said:


> Mortgages are meant to be retired as quickly as possible.


I agree. Pay off the mortgage ASAP regardless of interest rates, or investment returns. There's nothing like being in a situation where you have a house paid for and no debt. That's when you can start to accumulate retirement savings at a very fast pace. Think of it this way: If you are saving $1,000/month for retirement & paying $1,000/month on a mortgage, when the mortgage is cleared you have $2,000/month for saving/investing. Also the value of knowing you have a place to live regardless of what might happen in the future, is hard to quantify, but it's huge.


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## AltaRed (Jun 8, 2009)

pwm said:


> I agree. Pay off the mortgage ASAP regardless of interest rates, or investment returns. There's nothing like being in a situation where you have a house paid for and no debt. That's when you can start to accumulate retirement savings at a very fast pace. Think of it this way: If you are saving $1,000/month for retirement & paying $1,000/month on a mortgage, when the mortgage is cleared you have $2,000/month for saving/investing. Also the value of knowing you have a place to live regardless of what might happen in the future, is hard to quantify, but it's huge.


I would have put all $2k/month into the mortgage. Debt has become way too fashionable today and consumers are now getting squeezed. It's very difficult (and too late) to get out from under debt when one is already running on the tread mill to keep up.


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## pwm (Jan 19, 2012)

AltaRed said:


> I would have put all $2k/month into the mortgage.


Yes, I agree. I was thinking about my experience back in the day when one could only apply cash to the mortgage when it was up for renewal. In my case that was every 3 years near the end. So I was saving to come up with the cash, and then paying it on the mortgage when it was renewed for a new term. When it was paid off, my savings about doubled. That's what I was trying to convey. Mortgage terms are much more flexible now, and if I was doing it today, I'd be putting every available dollar towards the mortgage debt as you suggest.


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## AltaRed (Jun 8, 2009)

Interesting. I always remember having a 10% prepayment option every anniversary, even through the '70s. Either way, we took every opportunity to do a whack job on the mortgage.


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## Mookie (Feb 29, 2012)

If you enjoy paying extra interest to the bank, then stop the prepayments, otherwise keep going. 

When I had a mortgage, I took every opportunity possible to make extra payments, and it shaved years and thousands of dollars of interest off my mortgage. With the current low rates beginning to rise, now is your opportunity to eliminate that debt.


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## pwm (Jan 19, 2012)

AltaRed said:


> Interesting. I always remember having a 10% prepayment option every anniversary, even through the '70s. Either way, we took every opportunity to do a whack job on the mortgage.


Actually, now that you mention it, I had the same option. 10% per year and any amount at renewal time. It's been 34 years since I paid it off, and my memory must be failing.


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## MarkLinMTG (May 2, 2018)

I would say it depends on how much cash you have on hand and how you're making the pre-payments.

Are you making a large lump sum pre-payment or just setting a small increase to your monthly payments?
When making large lump sum pre-payments, I would make sure that you keep sufficient cash on hand for unexpected life circumstances.


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## AltaRed (Jun 8, 2009)

As I mentioned in a prior post, one's emergency fund.


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## Mortgage u/w (Feb 6, 2014)

What worked for me is increasing my payments on a regular basis (at least annually) and the odd lump-sum pre-payment. I'm allowed a 15% payment increase per year + an additional 15% lump-sum prepayment per year. 

I went from a 25 year, monthly payment mortgage, down to 7 years with my increased bi-weekly payments. I accomplished this in only 5 years time.

I will soon be increasing my payment once again to get it down to 5 years. Once my balance is low enough (less then my 15% prepayment privilege), I will pay it off completely.


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## lightcycle (Mar 24, 2012)

Psychologically, when you make every possible additional payment to your mortgage, you are acclimatizing yourself to living on a lower budget. After this mortgage is paid off, if you can keep up the level of payments to your investments (instead of to the bank), you can amass quite a nest egg. And the best thing is that in retirement, this reduced level of spending means your nest egg doesn't have to be as large and will last you quite a long time.

This mindset of continually living well within your means and paying yourself first starts today by aggressively paying down your mortgage and any other debts.


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## Earl (Apr 5, 2016)

What is preventing me from making prepayments, is that I work in an industry where layoffs are common. So I need to be prepared to survive without any income for quite a while. As a result, all my extra money has been going into my TFSA and RRSP so that I can easily access it if I lose my job and it takes a long time to find another. Am I making the right choice?


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## fireseeker (Jul 24, 2017)

Earl said:


> What is preventing me from making prepayments, is that I work in an industry where layoffs are common. So I need to be prepared to survive without any income for quite a while. As a result, all my extra money has been going into my TFSA and RRSP so that I can easily access it if I lose my job and it takes a long time to find another. Am I making the right choice?


Short answer: It depends.
Longer answer: It depends on how much is saved in the TFSA, RSP and cash accounts; it depends on how long you might expect to have to draw on it; it depends on how much debt you have; it depends on your mortgage size and interest rate; it depends on your age; and it depends on your dependents, if any.


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## christinad (Apr 30, 2013)

Thanks for the replies. It looks like no one regrets paying off their mortgage. I just noticed that for the first term of my mortgage the years seemed to fly off and now the years seem painfully slow to come off.


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## nobleea (Oct 11, 2013)

Earl said:


> What is preventing me from making prepayments, is that I work in an industry where layoffs are common. So I need to be prepared to survive without any income for quite a while. As a result, all my extra money has been going into my TFSA and RRSP so that I can easily access it if I lose my job and it takes a long time to find another. Am I making the right choice?


Most banks keep track of prepayments and allow you to use them as 'credits' in times of hardship. So if your monthly payment was 2K and you had made 20K of prepayments up until now and suddenly got laid off, you would be allowed to take 10 months off from not paying the mortgage. Of course your 20K prepayment wouldn't be a prepayment anymore, they would take off what your interest portion of the payment would be each month and keep for themselves.


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## lightcycle (Mar 24, 2012)

christinad said:


> Thanks for the replies. It looks like no one regrets paying off their mortgage. I just noticed that for the first term of my mortgage the years seemed to fly off and now the years seem painfully slow to come off.


But wouldn't it be even more slower if you *didn't* make a pre-payment...?


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## OptsyEagle (Nov 29, 2009)

christinad said:


> Thanks for the replies. It looks like no one regrets paying off their mortgage. I just noticed that for the first term of my mortgage the years seemed to fly off and now the years seem painfully slow to come off.


Also, keep your eye on the balance not the time left. It will be feel more rewarding and is more relevant. As you indicated, as you pay down your mortgage the same mortgage pre-payment reduces the years outstanding of your mortgage less and less...but it reduces the outstanding balance by a greater and greater percentage.


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## AltaRed (Jun 8, 2009)

christinad said:


> Thanks for the replies. It looks like no one regrets paying off their mortgage. I just noticed that for the first term of my mortgage the years seemed to fly off and now the years seem painfully slow to come off.


As 'lightcycle' mentioned, it would be even slower if you didn't make pre-payments. The momentum accelerates as more of each payment goes towards principal, and an extra payment, or a prepayment is 100% principal. That is how those of us who have paid off mortgages in 12-15 years get there. The years just melt away in the latter 50% of the mortgage balance. It is easy enough to see that if you run a payment schedule with a mortgage calculator, and include either, or both of, the extra payment (paying on a bi-weekly rather than monthly schedule) and a 10% mortgage balance prepayment on every anniversary. 

The key to being able to do this is twofold: 1) Don't buy more house than you can comfortably afford to keep mortgage payment well within the comfort zone, and 2) be very disciplined in your spending budget with mortgage 'buy downs' highest on the priority list after essentials like eating and paying utility/tax bills. Be disciplined and after 10 years, you won't have a worry in the world.


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## Mookie (Feb 29, 2012)

AltaRed said:


> The key to being able to do this is twofold: 1) Don't buy more house than you can comfortably afford to keep mortgage payment well within the comfort zone, and 2) be very disciplined in your spending budget with mortgage 'buy downs' highest on the priority list after essentials like eating and paying utility/tax bills. Be disciplined and after 10 years, you won't have a worry in the world.


This is so true. Unfortunately most people won't be able to achieve this because they want it all, and they want it now, but for those that have the discipline and determination, it pays off big-time down the road.


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## christinad (Apr 30, 2013)

Thats good advice to focus on the mortgage balance. Otherwise i get discouraged. I think i'll just throw money at it like i did last term without overthinking things as that seemed to work.


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## christinad (Apr 30, 2013)

Oops duplicate post.


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## Pluto (Sep 12, 2013)

either way - extra payments, or not extra payments won't be a disaster now that your interest component is small. the first 5 years is the worst for large interest component in each payment. Once my interest component became small, I paid off as slow as possible as it's basically free money. Also inflation devalues the debt, while cost of living increases in income keeps income from devaluing, so paying it off slow works best if one has annual income increaases.


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## Retiredguy (Jul 24, 2013)

Pluto said:


> either way - extra payments, or not extra payments won't be a disaster now that your interest component is small. the first 5 years is the worst for large interest component in each payment. Once my interest component became small, I paid off as slow as possible as it's basically free money. Also inflation devalues the debt, while cost of living increases in income keeps income from devaluing, so paying it off slow works best if one has annual income increaases.




I accept that there is a big difference with these low interest rates but you are never wrong to pay down your mortgage. It may be enticing not to with low rates but what are you doing with the money if you are not making the extra payments? If as some young people I know are doing it is to enhance life style, and that is foolish.

Interestingly as some others have said among the best move they ever made was to pay it off ASAP. We were mortgage free at age 30 after intensely paying off a 11.5% mortgage. It allowed us other freedoms, great peace of mind and to make significant investments elsewhere. When we paid it off rates had shot way up to 19 %. People were losing their homes (and jobs) in droves. People were walking into the banks and handing in the keys and the bankers had been told by the bosses no, no, no don't take them! My fear for those with these low rates of the past 20 years is they simply don't think rates change much AND ARE CONTENT NOT TO MAKE EXTRA PAYMENTS BECAUSE THEY THINK IT IS FREE MONEY. Rates do change and can change very quickly so why not protect yourself and pay it down ASAP.

The first payment of a 2.8 % mortgage amortized over 25 years is 50/50 interest/principal. Change that to 11.5% and its not until the 19th year that it becomes 50/50.


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## AltaRed (Jun 8, 2009)

Pluto said:


> either way - extra payments, or not extra payments won't be a disaster now that your interest component is small. the first 5 years is the worst for large interest component in each payment. Once my interest component became small, I paid off as slow as possible as it's basically free money. Also inflation devalues the debt, while cost of living increases in income keeps income from devaluing, so paying it off slow works best if one has annual income increaases.


That is non-sensical. Mortgage interest rates are related to inflation over rolling periods of time. A 3% mortgage with CPI at 2% is directionally the same as a 15% mortgage with CPI at circa 13%. Why pay down a 15% mortgage then if inflation is going to ravage the value of the debt over time? All debt is a boat anchor. Get rid of it. 

Our society has become numb to debt and has normalized it, but it is no 'healthier' today than when it was in the 19th century. Debt always limits options and squeezes the arteries of life.


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## christinad (Apr 30, 2013)

For me, i'd like to maintain my savings goal for my rrsp and tfsa as my understanding is the earlier you do these deposits the longer you have to let compound interest do the work. Plus i want to enlarge my emergency fund. Its difficult to juggle these goals and do prepayments but i'm going to try. I think its like that for a lot of people.


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## AltaRed (Jun 8, 2009)

I agree having a healthy emergency fund should be the first thing on one's list.


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## Mortgage u/w (Feb 6, 2014)

Retiredguy said:


> ....The first payment of a 2.8 % mortgage amortized over 25 years is 50/50 interest/principal. Change that to 11.5% and its not until the 19th year that it becomes 50/50.


I hope that resonates with those who maximize their borrowing capacity.


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