Last week, my first $600 mortgage payment came out of my bank account. $217 went to interest, and $383 went to the principal. That got me thinking about the different mortgage payment schedules, and how that will affect me in the future. Because I’m a natural planner, and obsessed with numbers, I decided to break it down by using the VanCity Mortgage Payoff Calculator.
Take a look at the following 4 scenarios based on my mortgage:
I bought my one-bedroom townhouse in Vancouver for $259,000, and am carrying a mortgage amount of $238,288. I took a 5-year fixed rate at 3.74% over a 30 year amortization, and my minimum mortgage payments are approximately $1,098/month.
Mortgage payment: $1,098 monthly
Amortization: 30 years
Interest paid: $157,102
Age when paid off: 59
Mortgage payment: $549 accelerated bi-weekly
Amortization: 26 years
Interest paid: $133,379
Age when paid off: 55
Mortgage payment: $600 accelerated bi-weekly (10% prepayment)
Amortization: 23.5 years
Interest paid: $113,469
Age when paid off: 52
Mortgage payment: $660 accelerated bi-weekly (20% prepayment)
Amortization: 20.5 years
Interest paid: $96,994
Age when paid off: 49
Please note that none of the scenarios above don’t take into consideration any annual lump sum payments I might put towards the principal.
Right now I’m using Scenario 3, but in a few months will move to Scenario 4. Of course, an argument could be made that taking the extra money I’m putting towards my mortgage is better off invested for the potential of a higher return. But, there is a huge psychological advantage to paying off your mortgage as fast as possible, and by putting money towards my mortgage, that’s a guaranteed return of 3.74%. In fact, the only way I wouldn’t make prepayments towards my mortgage is if it affected the amount I was contributing to my RRSPs. But as it stands, I am still contributing the same amount as I had been before I got the mortgage, so I feel comfortable with my decision.
With the mortgage I have with VanCity, I am allowed to contribute a lump sum up to 20% each year on my anniversary date as well as prepay up to 20% on my mortgage payments. I’m not sure how much of a lump sum I will be able to contribute because I have other savings goals in mind. I will still contribute something on each anniversary date, but by prepaying to the maximum allowed on a bi-weekly basis (Scenario 4) will ensure that I am doing all that I can budget-wise to pay off my mortgage as fast as possible. AND it keeps me in line for my #1 goal of early retirement.
Who knows what will happen down the road, but at least I’m doing what I can right now to make sure I’m setting myself up for success in the future.
Of course, the scenario doesn’t take into account the fact that mortgage rates in Canada will eventually change. But it does stand to illustrate just how powerful prepayments can be to a mortgage amortization!
Are you currently prepaying, or do you plan on prepaying on your mortgage?