The Real Impact of Accelerating Mortgage Repayment

Every extra dollar paid on your principal generates a guaranteed return equal to your interest rate. Unlike stock market investments, this return is certain and risk-free. Understanding the real impact of different acceleration strategies allows you to make informed decisions and maximize savings over the life of your mortgage in Quebec.

Scenario 1: Accelerated bi-weekly payment

Accelerated bi-weekly is the simplest and most accessible strategy. Your monthly payment is divided by two, but you pay it 26 times per year instead of 24. The difference between 26 and 24 payments represents exactly one extra month of repayment per year, applied directly to principal. On a $350,000 loan at 5% over 25 years, the monthly payment is about $2,038. In accelerated bi-weekly, you pay $1,019 every two weeks. The result: about $35,000 in interest savings and three fewer years on your amortization. The real cost to you is about $100 more per month, spread over 26 payments.

Scenario 2: Annual lump-sum payment

An annual lump-sum payment of $10,000 directly on principal transforms your repayment trajectory. In the first year, this lump sum immediately eliminates $500 in annual interest (at a 5% rate). But the compound effect is even more powerful: every dollar of principal repaid reduces interest for all subsequent years. Over the full loan duration, a $10,000 annual lump sum saves about $45,000 in additional interest and reduces amortization by 4 to 5 additional years. The best time to make the lump sum is at the start of the contract year, to maximize interest reduction.

Scenario 3: Regular payment increase

Increasing your regular payment by 10% adds about $200 per month on a $2,038 payment. This increase, entirely applied to principal, reduces amortization by 2 to 3 additional years. Most Quebec mortgage contracts allow an annual payment increase of 10 to 20%, without fees or penalty. This strategy is particularly effective after a salary increase or the elimination of another monthly debt.

Comparing the three acceleration strategies

• Accelerated bi-weekly: additional cost of about $100 per month, approximately $35,000 in interest savings, 3 years off amortization. No setup fees.
• Annual lump sum of $10,000: approximately $45,000 in additional interest savings, 4 to 5 additional years off amortization. Apply at the start of the contract year for maximum effect.
• 10% payment increase: about $200 more per month, significant interest savings, 2 to 3 additional years off amortization. Permitted by most contracts without penalty.
• Combining all three: amortization reduced from 25 to under 15 years, total savings of over $100,000 in interest on a $350,000 loan at 5%.

Prepay or invest: how to decide

The classic question is whether it is better to prepay the mortgage or invest the surplus. The basic rule is simple: if the expected return on your investments, after tax, exceeds your mortgage rate, investing is mathematically preferable. However, mortgage prepayment offers a guaranteed, risk-free return, which is not the case with stock markets. For borrowers who value security and peace of mind, prepayment is often the best option. A hybrid approach is also valid: maximize RRSP contributions to get the tax deduction, then use the tax refund as a mortgage lump sum. An AMF-certified broker helps you model these scenarios according to your tax situation and goals.