With the March 1st RRSP deadline fast approaching, mortgage prepayment privileges are probably the last thing on your mind. For many families, it’s all or nothing when it comes to RRSPs and mortgages – they either choose to increase payments on their mortgage or save for retirement, not both. But with a balanced approach, you can do both. Far too many people aren’t taking advantage of their mortgage prepayment privileges – according to the Canadian Association of Accredited Mortgage Professionals (CAAMP), only a third of homeowners made additional payments last year. Let’s take a look at the three most common prepayment privileges and how you can benefit from them.
1. Payment Increase
Once a year, most closed mortgages will give you the flexibility to increase your mortgage payment amount. You can usually increase your payment by up to 10 per cent or 15 per cent. While your regular mortgage payments go towards principal and interest, your payment increase will go directly to principal – this can shave years off the life of your mortgage. For example, if your monthly mortgage was $1,000, increasing your payment by 15 per cent means you could contribute an extra $150 per month towards the principal of your mortgage.
2. Lump Sum Payment
For a number of homeowners, lump sum payments are what first come to mind when they hear “prepayment privileges”. Lenders typically allow you to pay 10 per cent to 20 per cent of your outstanding mortgage each year. For example, if you have a mortgage of $200,000, a 20 per cent lump sum payment would be $40,000. That may sound like a hefty amount, but if you are saving for it or come into the money some other way, it is an excellent way to save on interest and cut time off your total amortization period.
3. Increase Payment Frequency
Your mortgage is most likely the largest debt you will ever have. By increasing your payment frequency, you can save thousands in interest simply by paying the same amount more often. With accelerated payments, you can pay your mortgage even faster, because you end up making extra payments than you would if you were making your regular monthly mortgage payments. For example, if your monthly mortgage payment was $1,600, an accelerated bi-weekly payment would divide that amount in half ($800) and you would pay that amount every two weeks – in this example, you would make 26 payments versus 24 regular bi-weekly payments, or an extra $1,600 each year.
RRSP Contribution vs. Mortgage Prepayment
Even if your budget is tight, you can still make RRSP contributions as well as consider your mortgage prepayment options. By making an RRSP contribution, you could then use a portion or all of your tax tax rate of 31 per cent, you’ll receive a refund of $930, which can be made as a lump sum payment towards your mortgage. Mortgage rates aren’t going to be low forever, so take advantage of them now and pay down your mortgage aggressively while you can.refund as a lump sum payment. For example, if you make a $3,000 RRSP contribution with a marginal