2023-05-29 04:00:00
Marie-Pierre stamps with joy. His employer has just granted him a generous bonus to highlight the quality of his work. The euphoria of the moment passed, she wonders what she will do with this gift fallen from the sky.
Take a trip? Update your wardrobe? Treat yourself to a more powerful computer than your bike? A lightning tinged with wisdom suddenly strikes her. “And if I repaid my debts! My end of the month would be less difficult! But I signed agreements with the financial institution…”
Here’s how to proceed, whether it’s a personal loan or a mortgage.
The personal loan
- Repayment of a personal loan can be made at any time, without penalty. It suffices to pay all or part of the balance of the initial capital borrowed. Assume a $10,000 loan taken out at 12.49% amortized over 5 years. The table below shows an accelerated repayment by adding $100 to the monthly payment, which changes the term of the loan. The interest savings realized will be $1433.
- Amount: $10,000
- Rate: 12.49%
- Amortization: 5 years
The mortgage loan
The accelerated repayment of the mortgage loan without indemnity makes it possible to reduce the term of the loan as well. Repayment terms, which vary by financial institution, are normally done in one of the following ways.
- By adding a lump sum to each monthly payment.
- By paying part of the borrowed capital annually, i.e. 10, 15 or 20%.
The following table shows an example of a $100,000 mortgage loan and the impact on maturity of two types of accelerated repayment, either by adding $100 to the monthly payment or by making an annual prepayment of $15,000 (15% $100,000).
- Amount: $100,000
- Rate: 5.54%
- Amortization: 25 years
Conclusion
When making an accelerated repayment, you must take into account all your financial needs. Because if it is too large and we can no longer meet our short-term obligations due to lack of liquidity, we will have to resume the operation in the near future. So get out the calculator, figure out all the options and pick the one that’s right for you. You have everything to gain from it, it allows you to make significant savings in the long term.
Advice
- When renewing the mortgage, if the current interest rate has dropped from what you were paying before, maintain or increase the payment amount. This sum will reduce the balance of the loan, which will be repaid more quickly.
- Pay off your credit card balances first before making an accelerated mortgage payment.
- Another way to advance the maturity of your mortgage loan is to reduce the amortization period at the next renewal, for example, from 20 to 15 years.
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