Let’s face it, 30 years of mortgage payments can feel overwhelming and confining – a debt sentence, if you’ll excuse the pun! In this guide, I give you actionable tips on how to pay off your mortgage faster and easier in Canada.
I’ll explain why paying a mortgage quicker is beneficial and look at financial situations where doing so may not be your best money move. After looking at obstacles in paying off mortgages faster, I’ll give you doable methods for getting rid of mortgage debt sooner to accomplish goals such as stopping to pay interest and having more home equity and fewer expenses in retirement.
Why Pay Off Your Mortgage Faster?
Being out of debt before 25 or 30 years can sound like the best reason to quickly pay off a mortgage. For example, you stop paying interest when the principal amount you borrowed is fully paid. So, the sooner you pay off the mortgage, the sooner you free up more cash flow that can be used towards other purposes.
Also, the more money you pay to reduce the mortgage increases the equity of your home. That can mean being able to get a home line of credit with a more favorable interest rate if you encounter a significant expense rather than having to get a personal loan. For some, a substantial benefit of paying off your mortgage faster is having a peace of mind in being debt free on their property.
Pros and Cons of Paying Your Mortgage Faster
While having your mortgage paid off by retirement can be a worthy and an intelligent goal, this isn’t always the case. When extra savings are invested over long term with returns that exceed the mortgage rate rather than used to accelerate mortgage payments, you may have substantially more money.
Of course, the justification to investing the extra savings involves a higher-risk investment, so it may not always be the better decision either. If your investment’s interest rate is lower than your mortgage interest rate, paying off the mortgage early will be better. Everybody’s best option will be based on their careful assessment of their finances and financial goals, and that’s the only way you should choose whether to pay your mortgage faster or not.
The Challenges of Paying Off Mortgage Faster
If you decide that paying your mortgage in full early is the best financial decision for your situation, there are some challenges to be aware of. The primary drawback is that you usually can’t reverse the decision until the term ends once you decide to make higher mortgage payment amounts. So, if an emergency money situation arises, you won’t be able to use those funds. Having separate cash saved up for emergencies is an excellent way to help solve this problem or having access to a line of credit.
Avoiding mistakes leading to a penalty when paying your mortgage early can be a huge hurdle. It’s not uncommon for mortgage holders to be unaware of their lender’s prepayment penalty. The prepayment penalty is generally the higher of the interest rate differential or an amount equal to 3 month’s interest on your outstanding mortgage balance for a fixed term mortgage. Variable rate mortgages only uses the 3 months worth of interest on the outstanding balance to determine the prepayment penalty. Depending on the circumstance, the penalty could be substantial.
Methods You Can Use To Pay Off Your Mortgage Faster
If you do decide that paying off your mortgage quicker is the best move for your future and finances, there are several different ways you can choose from to achieve this. Here are some of the best options to consider for paying off a mortgage early:
Increase Your Payment Amount
Even if you can’t achieve it every month, doubling the amount of your mortgage payment when you can lets you make huge strides in paying off your mortgage faster. Your extra payments can go directly to reduce the principal balance, saving you interest charges.
Of course, always be aware of your prepayment privilege so that you don’t exceed the limit and receive a penalty charge. It can be possible to pay off a 25-year mortgage in as little as ten years with double payments applied to the principal. Check the mortgage contract about increased mortgage payments that says that your payment increase will be applied only to the principal.
Increase the Frequency of Payments
Paying off a mortgage faster isn’t just about increasing your payment amount but also the number of times you pay. Instead of a monthly payment, consider semi-monthly, biweekly, or weekly payments to pay off your mortgage sooner. The main benefit here is that you will reduce the amount of interest you must pay.
For example, if you make your mortgage payment every two weeks rather than once a month, you pay the same principal amount; however, you will save thousands of dollars in interest throughout the amortization of the mortgage. On top of that, you’ll be making an extra payment toward your mortgage each year since every two weeks works out to 26 annual payments for 13 monthly transactions instead of 12.
Make a Lump Sum Payment
A lump-sum payment on your mortgage can boost your early mortgage pay-off goal. The principal is the original amount you borrowed, while interest is added to your mortgage payments until the principal is paid off. So, if you pay off the principal sooner, you won’t need to pay any more interest.
Reducing the interest you pay is an intelligent reason to use a windfall of money for a lump sum payment to your mortgage. This one-time amount might be an inheritance, larger-than-expected tax return, work bonus, or another amount you don’t need to use or invest. Pay attention to lump sum lender limits, especially if you have a closed mortgage. Most closed mortgages in Canada allow between 10% – 20% in annual pre-payments or lump sum payments.
Refinance Your Mortgage
Going back to lump sum payments just for a second, a prime time to consider making one on the principal is when your mortgage is up for renewal.
It helps to always shop around for the best rates and terms when refinancing your mortgage before making a refinancing decision.
How to pay off the mortgage faster by refinancing involves shortening your amortization period, meaning you will increase the payment amounts and frequency. It helps to think of refinancing as restarting your mortgage. Searching for and finding the best rates and terms possible might give you a new surge upward in realizing your goal of paying off your mortgage early.
Downsize Your Home
Downsizing your home in Canada doesn’t have to wait until retirement is nearing. Although downsizing isn’t for everyone, selling larger property and moving to a smaller household can free up extra money to pay off your mortgage. All costs of moving must be considered to ensure downsizing will give you enough money to pay off your mortgage faster.
Think about the location and the lifestyle you need and want if you’re planning a downsizing move. Careful research and cost-checking will have to be done to secure the funds you hope to free up for getting your mortgage paid up faster. Also, discuss the housing market and your mortgage with an expert to help you more accurately gauge your costs vs. profit when selling and buying a home.
Talk to an Expert
I hope this article gave you some food for thought about whether paying off your mortgage faster could be suitable for your financial position. If the money is likely to provide a better investment return before retirement instead, an early mortgage pay-off might not be best, but otherwise, paying off your mortgage faster is probably the better choice.
To learn more about current mortgage trends in the Vancouver real estate market, contact your Vancouver realtor – Kim Lee. I look forward to hearing from you and answering your mortgage questions.