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Hi Everyone, welcome to another edition of Homebuyer's School, today I'm joined
by Mutjaba Syed, manager mobile
mortgage specialist with TD Canada Trust and today the question we're gonna
answer is, how do mortgage payments work?
Yeah Karl that's a great question, so
mortgage payments, the way they work is there a mortgage payment consists of
two different things which considered a mortgage principal which is the amount
of money that you're paying down on your mortgage, and also the interest portion
called P&I, principal plus interest. So interest portion is just whatever the
interest rate is based on what you've picked, so your mortgage payment
consists of your mortgage principal and your mortgage interest.
Great, so how do you go about calculating your mortgage payments?
Yeah that's a good question, so your
mortgage payments are determined on a lot of different factors, on your
purchase price, the amount of down
payment you put down so your mortgage
amount, interest rates, amortization
which we discussed last time so
amortization just means the life of the
loan, the higher the amortization the lower the
payment is, but also means that it will take you that much longer to pay off
your mortgage, lower the amortization higher payments so a mortgage payment
is determined in all those factors to see what your payments are going to be.
Great, is there--do you know which is better to have, a bi-weekly vs a monthly?
Yeah absolutely. So kind of just depends on what your personal preference is, it
could depend on your pay structure if you're getting paid monthly then maybe
having a mortgage payment come out monthly it would make sense with your
budgeting, if you like bi-weekly if you feel it's a lot easier for you to budget
bi-weekly, it's a lot more convenient for you, you can set up biweekly. Banks also
offer semi-monthly which is twice a month and sometimes even weekly so it
really depends on what your comfort level is and what you set yourself for
your budgeting.
So Mo, I've also heard about
accelerated and not accelerated, can you explain that a little bit more in terms
of accelerated payments and non- accelerated payments?
Yeah absolutely.
So all banks actually give you some prepayment options available to actually
help pay off your mortgage sooner, any prepayment options taken advantage of
goes right towards your principal so accelerated payments just means paying
a little bit extra compared to a normal payment which actually can make a
huge impact on paying it sooner and reducing amortization which in turn also
reduces your interest charge as well, gernally at the interest cost so the
difference between the accelerated and non-accelerated is non-accelerated is
your normal payment accelerate payment just means a little bit more whatever
you've actually budgeted to pay above and beyond your normal payment will be
an accelerated payment.
One question I've always wanted to know is if you had the
capability, let's say you have five years left on your mortgage, if you had the
capability to pay off your entire mortgage all at once right, is it better
to continue paying it monthly or bi-weekly or is it better just pay it
off all at the same time?
Yeah, so that's a great question as well
Karl, it's all based on personal preference whatever your personal
preferences and whatever stage you're in so if you feel like, hey you have some
plans for those funds, you need those funds for a rainy day or you have some
investment plans, it's great to kind of hold on to that money. But if you feel
like, hey you want to get your mortgage paid off sooner, it's a great way but I
would definitely have a conversation with your bank to see, hey do you have
some prepayment options available to pay off the mortgage without facing any
penalties. Most banks offer prepayment privileges so you want to make sure you
have a conversation with them to see does your paying off your mortgage
fit within those prepayment privileges so there's no any penalties incurred to
do so.
So why would there be a penalty in paying my mortgage faster?
Well just depends Karl, there might be no penalties
and there could be a penalty, it just depends on your prepayment options that
you set with yourself at the bank at the time that you sign the contract with
them, you are allowed to have a certain amount so it's great to have a
conversation with them to see, "am I paying off my mortgage within the limits
of my prepayment options," and if it is great
there is no penalties, but if you've actually already used your prepayment
options available, there might be a slight bit of penalty. Once again it's a great
conversation to sit down and have with your bank or lender to see if there are any
So Mo, do you have anything else add in terms of mortgage payments?
Absolutely, what I would really recommend to clients if you set yourself a
budget and you have some free available funds available it's definitely to add a little
bit extra to your mortgage to kind of accelerate the payments, a little bit
extra I can actually make a huge difference on your life of the loan,
sometimes adding an extra 50 bucks, $50 bi-weekly or a $50 monthly could
actually impact your mortgage being paid off a lot sooner.
Perfect well thank you very much Mo. Remember everyone that we have a lot of
great videos on mortgage rates and mortgage pre-approvals that you can
find in the description below, thank you very much for joining us and we'll catch
you next time.
That's another edition of
Homebuyer's School. Tune in next time
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