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Discussion Starter #1
I save roughly between 400 to 500 a month extra toward our mortgage. I have it in a tax free savings account.

We have a 3.79 3 year fixed. I pay 1575 a month.

I dont trust my bank for the answers. So I would like to know is it better to put that money every month towards the principle? Or better to wait out the term and put the lump sump toward it then? I just want the principle as low as possible because Im worried about it getting higher than 5% fixed when Im done the term.
 

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You can model this problem for yourself using a mortgage calculator. There are Canadian mortgage calculators at www.dinkytown.net - they will let you enter your existing balance, term, amortization, interest rate, payment schedule and lump sum payments.

As a general rule, earlier prepayments are more favourable than waiting...for obvious reasons - you are reducing the outstanding balance (upon which interest is calculated) earlier.
 

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I save roughly between 400 to 500 a month extra toward our mortgage. I have it in a tax free savings account.

We have a 3.79 3 year fixed. I pay 1575 a month.

I dont trust my bank for the answers. So I would like to know is it better to put that money every month towards the principle? Or better to wait out the term and put the lump sump toward it then? I just want the principle as low as possible because Im worried about it getting higher than 5% fixed when Im done the term.
In addition to Money Gal's response, you should check the prepayment conditions of your mortgage. Some lenders allow additional payments at any time while others stipulate when additional payments can be made.
 

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I can pay whatever it seems. The calculator thing doesnt work. I have a mac. It just shows a blank screen. Not happy about that. It really looked useful to.:(
 

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If you are paying 3.79% interest, you should only consider keeping/investing any extra money you have IF the rate you will get is more than this amount. See last question.

I don't know of any TFSA that pays more than 2%. I say put the money down on the mortgage.

Do you have a rainy day savings fund (other than the $ being discussed here) in case adversity strikes?
 

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Increasing your monthly payment will result in the greatest saving because as you pay down the principal your next interest calculation will be on the lesser amount owed and then less of your money will go to interest and more will go to principal for every subsequent payment.

Now interest for mortgages is not calculated monthly. It may be semi annually or quarterly. I'm not sure what it is. They may well recalculate it when you make a prepayment.

The best person to calculate this is whomever holds your mortgage. They can also tell you what you are allowed to do with your payments.
 

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By law, mortgage interest in Canada is calculated semi-annually (i.e., twice per year).

If you like math, here is a decent web page which shows how to compound mortgage interest for both semi-annual and monthly (and more frequent) payments.

Bottom line, though; as I said earlier, earlier prepayments will always win (if the mortgage rate is held constant) because they reduce the balance on which interest is calculated. If you wait, you will pay more interest than you would otherwise pay.
 

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Maybe I should start a new thread, but is this how car loans work also? I bought a new car recently (financed by a bank) and then within about 30 days put down two separate significant chunks down. I note the monthly payment amount has not changed; they told me the chunks I put down merely reduce the duration of the loan.
 

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I am going to put it as a lump sum toward my mortgage at the end of each month. BUT im thinking Im going to write a check and have it put ONLY toward the principal. Guess its time to make an appointment with Scotia. Damn it. How i hate that bank.:cool:
 

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Maybe I should start a new thread, but is this how car loans work also? I bought a new car recently (financed by a bank) and then within about 30 days put down two separate significant chunks down. I note the monthly payment amount has not changed; they told me the chunks I put down merely reduce the duration of the loan.
Car loans generally have the interest calculated monthly, so no in terms of monthly vs every 6mths. The amount you have left to pay wouldn't reduce your payment amount, but would reduce the total interest paid. I tried to write an example but I think it was more confusing so I deleted it...

We recently opened up a Line of Credit and paid off a car loan with it. The interest rate is almost half which was the reason for doing it. The only way I know of to have your payment reduced but the term stay the same is to either go to a line of credit where you can decide for yourself how much you want to pay(minimum of interest). That way you could pay less on months where you needed to.
 

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No, I think he meant a LOC for your car loan, which would be better.
That is correct, I meant for a car loan. In regards to extra payments on your mortgage, get all of your other (if you have any) debt that you are paying a higher interest rate on paid off before you look to put any extra down on your mortgage.

In my case I have a LOC (~20k) and a mortgage (~200k), but the interest rate on the mortgage is actually higher than the LOC so any extra payments we would have put towards the LOC to pay it off we've dropped on our mortgage. The amounts don't matter, just the interest rate.
 

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I can pay whatever it seems. The calculator thing doesnt work. I have a mac. It just shows a blank screen. Not happy about that. It really looked useful to.:(
If it's blank, you probably don't have the latest version of Java installed. Use the Software Update from your apple menu to check that you have the most up-to-date version of Java.


I don't know of any TFSA that pays more than 2%.
A TFSA doesn't have to be a high-interest savings account. It could be a GIC, which could make 3 - 4%, or even a self directed TFSA which can hold mutual funds, stocks, bonds, or pretty much any investment. You have to think of the TFSA account as a variation of an RRSP account: it's just a special investment vehicle that has tax advantages.

By law, mortgage interest in Canada is calculated semi-annually (i.e., twice per year).

If you like math, here is a decent web page which shows how to compound mortgage interest for both semi-annual and monthly (and more frequent) payments.
Please correct me if I'm wrong, but I thought most financial institutions calculate mortgage interest on a daily basis, though the rate they show you has to be based on semi-annual compounding. The link you provided shows how the semi-annual compounding basis can be converted to an equivalent monthly compounding basis. But last time I moved my mortgage to another bank, the transfer occurred in mid-month and they had to make adjustments to compensate for about a week's worth of interest. The adjustment amount was calculated using a daily compounding rate (obtained using math similar to finding the monthly rate). Therefore, when you make a lump-sum payment in mid month - provided the lender allows this - the mortgage principal is immediately reduced and will lower the ratio of interest/principal on your next monthly payment. It DOES make a difference if you pre-pay at the beginning of a pay-period vs the end of the payment period... you're always better off paying as soon as possible. I think I once calculated that for every day that I delayed in making a $10,000 pre-payment, it would cost me a dollar in interest.

So, getting to the OP's original question of monthly pre-payments vs one lump sum, I would vote for a third option: pay as frequently as you can, provided the lender allows you to. If you're setting aside a portion of your paycheque to go toward the mortgage, then make the pre-payments right after each paycheque is deposited (which I suppose is monthly for some people).
 

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Elbyron: to be more complete, my post should have said, by law, mortgage interest in Canada must be *quoted* as calculated on a semi-annual basis. Obviously, as you have pointed out, it can and is calculated differently than semi-annually. The requirement is for semi-annual quoting, not semi-annual compounding.
 

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The calculator thing doesnt work. I have a mac. It just shows a blank screen. Not happy about that. It really looked useful to.:(
I have a Mac too and the calculator appears just fine for me. I'm using the latest version of Apple's Safari browser, but it also works in Firefox (Mozilla). Maybe you don't have javascript enabled in your browser -- the page runs on Java and you need to enable javascript if you're going to see the calculator.
 

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I have a Mac too and the calculator appears just fine for me. I'm using the latest version of Apple's Safari browser, but it also works in Firefox (Mozilla). Maybe you don't have javascript enabled in your browser -- the page runs on Java and you need to enable javascript if you're going to see the calculator.
Actually, upon a closer look, the javascript on the page is actually what is causing Don's problem:
var IEMAC = ((agt.indexOf("msie") != -1) && agt.indexOf("mac")!=-1);
...
if ( IEMAC ) {
return "<P>";
}

What this means is that the author decided you should see an empty paragraph element if your browser is Internet Explorer and you're using a Mac. It's rather stupid, but there's not much you can do about it other than switching to Safari or Firefox.
 

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What this means is that the author decided you should see an empty paragraph element if your browser is Internet Explorer and you're using a Mac. It's rather stupid, but there's not much you can do about it other than switching to Safari or Firefox.
The last version of IE for Mac was released in 2003, and you haven't been able to download it from Microsoft's site since 2006. So switching to Safari or Firefox is a good idea all around, especially since using such an ancient unsupported browser leaves you open to all kinds of security risks.
 

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I save roughly between 400 to 500 a month extra toward our mortgage. I have it in a tax free savings account.

We have a 3.79 3 year fixed. I pay 1575 a month.

I dont trust my bank for the answers. So I would like to know is it better to put that money every month towards the principle? Or better to wait out the term and put the lump sump toward it then? I just want the principle as low as possible because Im worried about it getting higher than 5% fixed when Im done the term.
The sooner you put the money against your mortgage the better. I have made some assumptions and done some calculations.

I assume that your mortgage amortization is 35 years and the original amount it $367,545 and the payment is of course $1,575.

If you don't prepay at all your balance at the end of 5 years would be $339,654.

If you prepay $5,400 yearly your balance at the end of 5 years would be $310,507.

If you prepay $450 monthly your balance at the end of 5 years would be $310,000.

So you save $507 in interest over 5 years.

If I project that over the life of the mortgage you are saving $3,255. This number will increase as rates increase.

So your answer is, pay now. When you renew ensure your new mortgage lets you make prepayments whenever you want.

Good luck!
 
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