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Annual Lump-Sum, Pay at the beginning? End of the year? Installments?
March 13, 2023
7:42 am
Save2Retire@55
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Hello,

I am trying to make sense of how this works. I plan to do double payments on my accelerated bi-weekly which is allowed with no fines.

I am also allowed to pay up to 15% of the mortgage in an lump-sum. Considering this extras go against the principal, does it make more sense to pay the 15% at the beginning of the year (or whenever it is available or pay it in installments, some % here some % there) vs. paying it all at once at the end of the year?

Why I am asking? Well, if it doesn't reduce the interest once paid at the beginning, I prefer to keep it in a HISA earning 4-5% instead of paying mortgage.

For the reference, my rate is 4.99% 39-months / 25-years but I hope to get rid of it in 4-5 years instead of 25.

Thanks.

March 13, 2023
7:58 am
Norman1
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Mortgage interest is not calculated and paid ahead of time. Mortgage interest is calculated on outstanding principal and charged either monthly or every six months.

Allowed extra payments should be made as soon as possible to reduce the balance the 4.99% interest is being calculated on.

March 13, 2023
8:02 am
Save2Retire@55
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Thank you so much, Norman. Can you elaborate on "every six months" which is my question too. I can confirm this with Desjardins (my lender).

If it's the case, am I gaining anything by paying it faster let's say in the 2nd month of the 6th months? Doesn't this mean, interest won't change until next calculations 4 months later (based on above example)?

March 13, 2023
8:46 am
Norman1
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The "every six months" or "every month" is the compounding period of the mortgage interest. It doesn't mean the interest is calculated on the opening balance of that compounding period. Check the fine print of the mortgage

A daily interest savings account is usually compounded monthly. But, there is an advantage in making deposits to the savings account in the middle of a month.

March 13, 2023
10:31 am
savemoresaveoften
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If I am not mistaken, Credit card outstanding balances are the ONLY "loans" that you pay interest for the full period, regardless when the balance is repaid during the period. Also to make it worse, every single new purchase one makes are carrying interest from day 1, thats how the credit card business make so much money off accounts that are not paid off monthly.

For all other bank loans including mortgage, one pays interest on what is still outstanding, the compounding timing is only a second order effect and not material for a "normal" size loan.

March 13, 2023
10:58 am
Save2Retire@55
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Fantastic. Thank you for clarification. I'll pay whenever we have money rather than waiting or putting in a HISA / investing in the choppy market.

March 13, 2023
11:34 am
Norman1
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It is a good idea to check the fine print of the actual mortgage one signed to confirm how its interest is calculated and charged.

Also check to see how early discharge of the mortgage by exercising the prepayment privileges would be handled.

I remember reading about someone who started doubling up all their remaining payments and made maximum prepayments, both allowed. That ended up paying off the mortgage balance before the end of its term! The person was then hit with early repayment penalty. sf-surprised

That's not likely going to happen if one still has 20 years left on the amortization. But, that could happen with a five-year mortgage with only five years left in its amortization.

March 13, 2023
12:07 pm
RetirEd
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It's always advantageous to pay off interest-bearing debt as early as possible. That's why mortgage lenders limit how much one can pay off at a time, and may charge a higher rate for flexibility.

Make sure to keep enough cash liquid to avoid having to take on high-interest emergency debt!

Remember, depending on your tax bracket, a penny saved can be nearly a penny and a half earned!
RetirEd

RetirEd

March 13, 2023
1:59 pm
Save2Retire@55
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@Norman1 - Yes, I'll read the details tonight. Just so many papers as you know. I won't be able to pay it off financially but even if I could, I'd end up paying fees as the double payment + 15% won't cover the mortgage within the next 39 months (My mortgage term). But I will only have a small amount afterwards that if lucky can probably pay off without a new mortgage, if not, will be a 1-2 year mortgage renewal.

March 13, 2023
2:03 pm
Save2Retire@55
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@RetirEd - Indeed, emergency is in place. I have multiple options that I can utilize even if no cash available. Tangerine LOC $25K prime rate, Desjardins equity LOC at Prime-0.5% rate, selling equities (stocks / ETFs), or use CCs hoping the emergency can be paid from income.

Also, still have child benefit and dividend income that can technically cover the mortgage itself.

Just hope I won't lose my job! That would be stressful.

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