How Prepaid Interest Works on Private Mortgages

Obtaining a mortgage in Canada can present a number of challenges to investors and homeowners. Thanks to recent changes in national law, potential borrowers have to go through what is known as a “stress test” to see that they can not only pay their potential mortgage under the prevailing interest rate without running afoul of established debt-to-income ratios, but that they could also do so should interest rates jump two percent. Because it is not possible to take out a loan that has a term as long as the typical mortgage amortization period (15-30 years), Borrowers will need run this test should they choose to leave their current traditional lender.

For some property owners, each renewal happens smoothly. However, for many others a renewal is not an option due to unforeseen circumstances and going through financial difficulties. When a renewal is not on the table, you will need to refinance, sell your home, or face possible foreclosure action. This is where prepaid interest mortgages can come in handy for Canadian property owners. A typical mortgage amortization involves paying for interest that comes after the payment has been made; if you look at an amortization schedule for a mortgage, you see that each payment consists of a portion that goes to interest and a portion that goes to principal. As the amortization schedule goes on, the portion of the payment designated for principal increases while the interest designation decreases. Basically, you’re paying off the interest first.

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A prepaid interest mortgage involves having the interest up front from the mortgage proceeds on the closing date. Prepaid mortgages are primarily used in refinance situations. If your credit is somewhat shaky, you’re between employers, your employment situation is not ideal having part or all of the interest paid upfront can be the difference between approval and denial of your funding request.

At Amansad Financial, we understand that the process of financing a home when you don’t meet the bank requirements can be stressful. Prepaid interest mortgages are one way for you to take some of the financial heat out of the situation, whether that involves paying more up front or making payments ahead of time when your financial situation improves during the mortgage, so that you end up owning your home free and clear sooner. If you have questions about your own situation, reach out so that we can determine how a prepaid mortgage may benefit you.

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