Mortgage Payment Basics

I’m sure you know what a mortgage payment is; a scheduled repayment plan for the mortgage you’ve obtained on a property. Now let’s look deeper into what a mortgage payment amount actually includes, how payments can vary, and how you can use your mortgage payments to reduce your mortgage principal quicker. I will try to cover the important details as well as provide some helpful tips when it comes to understanding your mortgage payment.

What is included in your mortgage payments?

Your mortgage payment is comprised of 2 main parts, principal and interest. Principal being the original mortgage amount you borrowed, while the interest portion is the cost of borrowing those funds. The only exception to this norm is interest only payments that some mortgage products feature, such as a Home Equity Line of Credit. Your rate type determines what portion of your monthly payment amount goes towards principal and what amount goes towards interest.

If you choose a fixed rate term, your mortgage payment is set and the percentage of your mortgage payment that goes towards interest and principal changes as the principal balance is reduced. Your mortgage professional can provide an amortization scenario to show you how the percentages change throughout the length of your fixed term.  With a lower amortization comes a larger mortgage payment, which equates to more of your payment going towards principal, resulting in your mortgage balance reducing faster. With a variable rate mortgage term the payment amount can fluctuate, though the percentage of payment that goes towards interest and principal will also change as the principal balance reduces. As a rule of thumb, it can be noted that the interest portion of the mortgage is always covered first with the remainder of the payment going towards principal reduction.  Variable rates are especially appealing right now due to the low interest rates offered which come with the possibility of accelerated mortgage balance reduction, more on that later though.

As some lenders offer the option of paying your property taxes with your mortgage, your mortgage payment could also potentially include a property tax portion. The lender will collect a tax amount from you with every mortgage payment that will be placed in a separate account until your property taxes are due for the year.  This amount is based on your annual property tax assessment and is charged in addition to your principal and interest mortgage payment.

Payment Frequency

Most mortgages default to monthly payments though there are actually a few ways you can repay your mortgage;

Monthly: due once per month, usually defaults to the 1st of the month, though some lenders will allow you to specify a different day of the month for your payment to come out once each month.

Semi-monthly: due on the 1st and 15th of every month. Not all lenders offer this option so double check in order to confirm it’s available to you.

Bi-weekly: due every 14 days, or 26 times per year. If you choose this payment frequency your first payment date will likely default to 14 days after your mortgage has closed. If you have a different date in mind to correspond with your pay periods, advise your mortgage professional. With this option you can also choose between regular or accelerated payments. Accelerated payments are higher and direct a larger portion towards your principal thereby paying down your mortgage faster. Let the lender know which one you would like.

Weekly: is once a week, usually a specific day every week. This frequency is usually also available in regular or accelerated options as well.

If you’re thinking of any other payment frequency than monthly, inquire about what day your “interest adjustment date” is going to be. This is important as it could result in an additional one-time, out of pocket, closing cost to you.

Mortgage Pre-Payments

You can put your mortgage payment to work for you by utilizing your pre-payment privileges to reduce your mortgage principal faster. The easiest way is to go with bi-weekly accelerated payments, though if you really want to ramp up the repayment, take a look at the 2 most common suggestions below:

Increase your payment amount

Most lenders allow you to increase your mortgage payment amount by 15-20% each year with no penalty due. Any amount above your minimum payment goes directly towards your mortgage principal which will reduce it quicker, resulting in less interest charged over the life of your mortgage. Your mortgage commitment will detail the pre-payment privileges your lender offers. Once you increase your mortgage payment, don’t worry, this does not have to be permanent as you can usually go back down to your original minimum regular payment amount with a call to your lenders customer service centre or a quick visit to your home branch.

Lump sum payments

If you don’t want to commit to a payment increase, then lump sum payments are for you when you have extra cash. Most lenders allow up to 15-20% lump sum payments to be made throughout each year. Depending on the lender, that’s 15-20% of your original mortgage amount or last renewed balance.

Your mortgage payment is more than just a way to repay your mortgage, it can also be one the biggest budget busters you have! Understanding how you can use it to your advantage is the key to maximizing your mortgage payment effectiveness. Once the mortgage qualifying is done, take the time to design a mortgage payment plan that is both affordable and also puts you in a favorable financial position. Think about including your financial planner or wealth specialist in the discussion to ensure you’re getting a well-rounded approach.