How will a lump sum payment affect my mortgage payments?
Dear Ross: I recently inherited $50,000, and would like to make a one time prepayment to my mortgage. The balance owing is around $180,000. Can I do this, and after I do, will my monthly payment decrease because my principal balance will be much lower? Thx
-P.T. Aurora, Ontario
Let’s start with your second question. The answer is no, your monthly payment will normally not decrease if your principle balance is reduced substantially. You will have a chance to arrange that at your renewal date. One exception however if is your home is financed by a Home Equity Line of Credit – in this case, yes your payment would reduce commensurately.
Now can you do this? Almost all closed mortgages allow for at least one lump sum prepayment per anniversary year of your mortgage. (Note, it’s not once per calendar year) Lenders vary the amount you can prepay – 15% is not uncommon; 20% you can readily find; and 25% is quite rare.
The percentage you can pay off is not a fraction of your current balance (in your case $180,000). It is normally a fraction of your original mortgage amount. So if you were allowed to prepay 15% per year and did so, by the time you were in your fourth year, you would actually be prepaying around 30% of the then prevailing balance!
Bottom line: Talk to your lender about their rules on paying large sums on your mortgage.
So to answer your original question, we need to review your documents (or ask your lender) these questions:
- How much did you initially borrow?
- What percentage of the original loan amount can you prepay each anniversary year of your mortgage?
- What is the anniversary date of your mortgage?
These three questions will quickly tell us exactly how much you can pay today, and the date when you can make another payment for the remainder.