Wednesday, August 12, 2009

The Executioner posed an interesting question yesterday.

"In the US, it is common for fixed-rate mortgages to have NO limit on prepayments. What would you do in that case?"

Here's what we are working with.
  • Home -- purchased Sept 2007 for $285000. Amortized for 12 years. Amount owing $129862.23. Payment $819.94 biweekly. Current amortization 6 years 5 months. Variable Interest rate 1.35%.
  • Ski Condo -- purchased May 2008 for $78500. Amount owing $37844.70. Payment $297.56 biweekly. Current amortization 5 years 1 month. Variable Interest rate 1.5%.
  • Maximum combined prepayment allowed $30900 yearly.

If we follow the above plan, both are scheduled to finish a week under 3 years from now.

So, to answer the question, if we were allowed to put in more, what would we do?

This year we will have invested $16000. Monies we will not be touching for a while. Because of the lowered economy, we have been putting aside cash in accounts for big stuff (like roofs) for the properties and cars. Total value of these accounts are $17000, aiming for $20000.

The timing has been good to establish the above cash accounts this year as our decision to take on the mortgage aggressively hadn't come until very recently. Doing so would eat up pretty much the amount we saved this year. One switches to the other. For the next 3 years we anticipate saving $10000/yr.

Any extra monies would have to come from a different place. Like our trips, the $10000 savings, seasons passes etc.

I'm not sure I'm willing to touch any of that to get the end date from 3 yr to say 2. When you get to this range, the effort difference to get from 3 to 2 becomes exponential.

When I was playing around with increasing our biweekly payment, I noticed that after a certain amount, I had to increase it even more to get the same decrease in amortization time. I liken it to the effort needed to get a 95% mark in school vs 80%.

So I chose the number that made the most sense as well as fit our criteria of not having to renew with the bank in 3 years (we are committed to a 5 yr term) and luckily the effort also means everything is paid for as well. (Note that the ski condo is a 5 year term also but it will be done at the same time as the house)

So we don't have to sacrifice too much of our lifestyle and that is what I meant by Win - Win.

On that note, I have my first Ballroom Dance lesson this afternoon, after a 2 year hiatus. Hopefully my new instructor and I will be a good fit!


  1. Thanks for the answer. Your rates are ridiculously low compared to the US. I am assuming that's why your mortgage has a maximum allowed prepayment amount. Is that per year?

  2. You'r welcome. And yes they are. We have to achieve that yearly to get our result. Our rate started at 4.5% 2 years ago.

    Part of my worry is that it will go up again. If it does, my fixed monthly payments will skyrocket. They will not allow you to decrease once you increase.

    The only type of mortgage we have that would allow unlimited payments are what we call Open mortgages, for people who are expecting a lump amount of money like from a sale of a house and you can pay the entire amount off at any time without penalty.

    The rates are usually much higher as they need to get their money from you. We had one of those for a month or so for the cottage as I was in the midst of selling my condo and once it was sold, I paid it off.

  3. Are all canadian mortgages fully adjustable? I seem to remember mortgages in europe are like that, there is no such thing as a fixed rate. I'm envious of how far you've come with paying down that balance!

  4. Thanks Miss M! No, most people I know are in fixed rate mortgages because they can count on the payments staying the same.