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Lump Sum Payment

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Reducing your Amortization with Lump Sum Payments

In general, a lump sum payment is a large payment made all at once, as opposed to smaller instalment payments made over time. In the context of mortgages, lump sum payments are large payments made in addition to your monthly payments, usually at most once per year. The major benefit of making a lump sum payment is that it counts directly against the principal of your loan, decreasing both the amount of interest you pay and the amount of time you pay it.

Lump Sum Payments and Your Mortgage's Principal Amount

Lump sum payments are applied directly to your principal loan amount. This means that you will not be paying interest on the lump sum as you do your usual mortgage payments. Lump sum contributions will not lower your monthly payments, unless otherwise negotiated, but will lower your total loan amount.

If you have extra money sitting around, it may be worth your while to consider making a lump sum payment on your mortgage. The money that you put in is converted directly into equity in your home. In most cases, you can access this money at a later date if needed.

Many lump sum mortgage calculators are available online to illustrate how making a such a payment will affect your loan over a course of time. There are also several mortgage calculators that allow you to input lump sum payments and calculate how much they may shorten your amortization.

Making a large lump-sum payment toward your mortgage amid term can save you a proportionate amount in interest payments over time, or even more. Take a look at the example given in the chart displayed below:

   
 
Lump Sum Payments
Mortgage Amount: $250,000
Interest Rate: 5%
Amortization: 25 Yr
Payment Frequency: Monthly
Lump Sum: $0 $5,000 $10,000
Interest Savings: N/A $11,022.30 $21,348.72
New Amortization: N/A 24 Yrs, 1 Mo 23 Yrs, 2 Mo
 
   

If you are a first-time homebuyer in the process of moving to a new home, or looking to refinance into a more advantageous mortgage product, be sure to inquire as to your ability to make lump sum payments within the mortgage term you select. There are several life events that could make the contribution of such possible:

  • A raise or bonus at work
  • An inheritance
  • Maturity of an investment
  • Dividends or returns on an investment
  • Sale of a car, boat or other asset
  • Receipt of a policy payout

If the terms of the mortgage to which you are committed currently does not allow you to make lump sum payments, examine your option to refinance carefully. If breaking your current mortgage contract would cause you to incur a penalty fee, and your current mortgage rate is competitive, it may be of greater benefit for you to complete your term. You still have many financially viable ways to implement any surplus funds into your financial strategy.

You may invest in a term-investment that will mature when your mortgage comes up for renewal, thereby growing the lump sum payment you can make when it becomes possible to do so. You could also make a tax-efficient contribution to your Registered Retirement Savings Plan (RRSP) or invest in a home renovation that will appreciate the property value for the day you decide to sell.

Plan ahead and examine your budget for room to contribute toward a lump sum payment. A small change in your spending habits, or the sale of a vehicle, may be all you need to accumulate a lump sum payment that will save you largely in interest payments over time.

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