I recently renewed my mortgage and as an avid listener of others, I thought the best thing for me to do would be to make prepayments or increase my payment.
I made calculations after I have got confused about the entire stuff; I used the online calculator of my bank and verified my results with my bank rep.
Here is what I found: within the term, making prepayments or increasing the payments certainly decrease the principal. However, this decrease is NOT substantially bigger than making the extra payment at the time of renewal next time; for example, a one-time $5,000 prepayment during the term only reduces the principal by $5,524. The extra $524 is what I get as a “benefit” within 4-years (the term). This is not good enough for me to get anxious and make an effort during the term to decrease my principal.
After seeing this, I decided to invest the money during the next 4 years (and hopefully not lose it at the market) and make a payment towards my principal while renewing the mortgage (you can pay off the entire mortgage at the end of the term if you want). At least I will have a chance to grow the money in between (and hopefully that will be higher than $524).
This gives me some sense of peace as I am now okay with going with the new mortgage without thinking too much about it. Another nice thing is that I was planning to cash in my emergency fund to make a prepayment; I do not have to do that right now and I am very happy with this.
Considering that 4 years later, the purchase power of the CDN dollar can drop a little bit and I can get other salary increases, I believe I can come up much easily with the same amount of lump-sum I was planning to pay nowadays four years later at the time of renewal.