What is Mortgage Curtailment?

Mortgage Curtailment means you pay off a part or parts of your mortgage, ahead of schedule. You can reduce your total outstanding amount and even get a lower interest rate!

What Is Mortgage Curtailment?

Mortgage curtailment allows you to pay an additional amount over and above your regular monthly payments. This additional amount is adjusted in the principal loan in order to reduce the loan sooner.

Essentially, it’s a way to accelerate the repayment of your mortgage and save money on interest charges.

Some lenders allow borrowers to make curtailment payments at any time. While some lenders allow curtailment payments on specific dates or within certain timeframes. It’s important to check with your lender to see what options are available to you.

How Does A Mortgage Curtailment Work?

A mortgage curtailment lets the borrower make an additional payment against his loan. This payment reduces the amount of interest charged on the loan.

Here’s an example of how mortgage curtailment works:

Say, you have a 30-year fixed-rate mortgage. The loan has a principal balance of $200,000, a 4% interest rate, and a monthly payment of $955. If you make an extra payment of $5,000 towards the principal balance, your new principal balance would be $195,000.

This would result in a lower interest charge for each subsequent payment and a shorter loan term.

Difference In Curtailment Payments

There are two types of mortgage curtailment payments: regular and lump-sum.

I. Regular payments: These are the additional payments made over and above the regular monthly payment. These payments contribute to reducing the principal balance of your mortgage. Thus resulting in a reduced amount of interest charged over the life of the loan. These payments can be a great way to pay off your mortgage faster and save money on interest charges.

II. Lump-sum payments: These are the one-time payment made towards the principal balance of your mortgage. These payments can come from various sources, such as a bonus at work, an inheritance, or the sale of another asset. These payments can reduce the amount of interest you’ll pay over the life and shorten the mortgage term.

The main difference between regular and lump-sum curtailment payments is the frequency and amount of the payments. Regular curtailment payments are smaller and made on a regular basis, while lump-sum curtailment payments are larger and made as a one-time payment.

Both types of payments can help you pay off your mortgage faster and save money on interest charges.

How This Impacts Your Mortgage

Making mortgage curtailment payments can have a significant impact on your mortgage.

With regular curtailment payments, you can reduce your principal balance of your faster. This reduces the total amount of interest charged over the total loan tenure. Hence, doing so will reduce your 30-year mortgage to 25 years or maybe less than that.

Lump-sum curtailment payments can also have a significant impact on your mortgage. By making a one-time payment towards the principal balance of your mortgage, you can reduce the total amount of interest charged over the life of the loan.

Points To Remember

Along with these prepayment options, do keep in mind the below:

• Extra mortgage curtailment payments do not replace your regularly scheduled mortgage payments. You cannot skip your monthly mortgage payments while making extra payments.
• Do not throw your emergency savings into a mortgage curtailment plan. Instead, pay it off as you can without risking your short-term financial viability.
• Lenders will not allow mortgage curtailment payments on loans that are not current. If you are behind on your loan, get up to date before going to the next step.
• You need to know the rules set by your lender for mortgage curtailment.

The Bottom Line

Mortgage curtailment allows you to make additional payments against your loan. It would help you reduce the amount of interest you’ll pay over the life of the loan tenure. Thus, saving thousands of dollars in interest charges.

It’s important to note that some lenders may have restrictions on when and how you can make curtailment payments. Learn from your lender about potential fees or penalties for making additional payments.

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