Managing a mortgage isn’t always straight-forward. Here are four questions we hear from our members along with answers to get you thinking about ways to manage your mortgage. Don’t forget that it’s always important to talk to a mortgage specialist; each person’s financial outlook and goals is different and you always want to make sure that you’re making the best choice for you and your financial security.
1. How can I pay off my mortgage faster? Are there advantages to doing so?
Paying off your mortgage faster means that you’ll not only own your home sooner, but also that you can potentially save a substantial amount in interest costs.
One option is to choose a shorter amortization period — that is, the life-span of your mortgage. If you can combine a shorter amortization period with more frequent mortgage payments, you’ll save even more. Even if you choose a longer amortization period, more frequent payments can make a big difference.
You can also pre-pay up to 20% of your balance each year with no penalty or fees.
Here’s an example of what you’d save on the same mortgage if you chose a 20-year amortization period instead of a 25-year. The interest rate for both examples is based on a three-year term.
* Interest rate is for illustration purposes only
2. I want to pre-pay more than 20% of my mortgage over the course of this year. Is there a penalty for doing that?
Yes. You can put extra money toward your mortgage at any time, but be aware that there is a pre-payment penalty charge for any pre-payments over the 20% yearly limit. Talk to one of our mortgage specialists before going over the 20% yearly limit to see how the money you may save on interest compares to the cost of the penalty charge.
3. I took out a three-year ACU cash back mortgage about a year ago but now I’d like to switch to a lower-rate mortgage. Would I have to pay some of the cash back?
Yes, you would have to re-pay part of the cash back and also pay a pre-payment penalty. The cash back re-payment depends on how many months remain on your mortgage term.
For example, if you have 12 months left on a three-year term you would have to re-pay one-third of the cash back plus the pre-payment penalty. Our mortgage specialists can help you compare the cost of switching with the cost of potential interest savings. Another option would be to extend your term at a blended rate.
4. How do you calculate the pre-payment penalty?
Your pre-payment fee is either the equivalent of three months of interest at your current rate or the interest rate differential (IRD) for the amount you pre-pay over the yearly 20% limit, whichever is higher.
The IRD is based on the amount you choose to pre-pay and an interest rate that equals the difference between your original mortgage rate and the interest rate you’d pay today for a mortgage equal to the amount remaining on your current mortgage.
For example, let’s say you have three years remaining on a five-year mortgage at a rate of 5% and you want to make a pre-payment over the yearly 20% limit. The current rate for a three-year mortgage (the time remaining on your existing term) is 3%. Your pre-payment penalty fee would be 2% on the outstanding balance of your mortgage (less the yearly 20% limit).
Keep in mind that IRD calculations can vary depending on circumstances. It’s in your best interest to talk to an ACU mortgage specialist before making any decisions that may result in pre-payment penalty fees so that you can make an informed decision.