Buying a property is often considered a good investment. For some homeowners, paying down a mortgage loan over 25 years is too long. Some people choose to pay it back more quickly. Are you wondering if this is the right option for you? See our tips.
By paying off your mortgage faster, you'll save on interest and shave time off your loan duration.
Since a mortgage is usually the most significant debt you'll have in your life, paying it off also brings peace of mind and a sense of accomplishment.
There are many ways to pay off your mortgage loan faster. Here are the 3 main options:
The frequency of your payments will impact how long you'll be paying back your mortgage. By making payments every 1 or 2 weeks, you'll repay the equivalent of one additional monthly payment every year. This means you'll pay your mortgage off more quickly. You'll pay back the borrowed principal faster and save on interest.
You can use an unexpected cash influx, such as a tax return, an inheritance or an annual bonus, to make an early payment on your mortgage.
During the same calendar year, you can prepay up to 10% of the principal amount borrowed without penalty. However, some fees may apply.
With prepayments, you'll repay the principal faster and save on interest.
Here's an example of how you can save on interest for a mortgage with fixed payments and interest rates throughout the amortization period:
Mortgage loan amount: $300,000
Fixed interest rate: 2.50%
Payment frequency: Monthly
| No prepayment |
With a $30,000 prepayment after the 5th year |
|
| Interest paid | $103,170 | $85,598 |
| Total of payments (principal and interest) | $403,170 | $385,598 |
| Savings on interest | $0 | $17,572 |
| Number of years to pay off the mortgage | 25 years | 22 years and 1 month |
With each payment of principal and interest, you can add up to 1 time the amount of your payment. That way, you can pay off your loan faster.
With these additional payments, you'll pay back the principal faster and save on interest.
Here's an illustration of an accelerated repayment using additional payments:
Mortgage loan amount: $300,000
Fixed interest rate: 2.50%
Payment amount: $1,343.90
Payment frequency: Monthly
| No additional payment |
With an added $200 for each payment starting in the 6th year |
|
| Interest paid | $103,170 | $91,453 |
| Total of payments (principal and interest) | $403,170 | $391,453 |
| Savings on interest | $0 | $11,716 |
| Number of years to pay off the mortgage | 25 years | 21 years and 10 months |
In certain situations, you may have to pay fees when you accelerate your mortgage payments. For example, fees will apply if you renegotiate or repay your loan in full before the maturity date or repay more than 10% of the principal.
Remember, if you pay off your mortgage faster, you'll have less money available for other things. That's why financial advisors recommend that homeowners verify they meet the following conditions before opting for accelerated payments:
While the idea of being free of a large debt is attractive, rushing to pay down your mortgage as quickly as possible is not always the best strategy.
You need to assess whether paying off your mortgage faster is the best option for you.
For example, a self-employed person with a fluctuating income may decide to take advantage of a few profitable years to pay back their mortgage loan faster. This would ease their financial burden in the future.
A homeowner who is close to retiring may decide to pay off their mortgage loan faster while they're still working. When their income drops, they'll have fewer expenses.
The faster an owner pays back their home, the sooner they can use their home equity for other projects, such as carrying out renovations or buying a rental property.
Take into account the state of the economy. For example, if mortgage interest rates are high and market returns are low, you should think about paying off your mortgage quickly. Conversely, if the market offers higher returns than interest rates on mortgages, investing could be a better option. Here's an example of an amount invested in a savings product compared with the same amount used to pay off a mortgage.
Monthly savings or additional payment amount: $250
Savings interest rate: 7%
Mortgage loan amount: $250,000
Fixed interest rate for the mortgage loan: 3.4%
Length: 15 years
| Savings of $250 | Additional monthly payment of $250 on a mortgage loan | |
| Interests | $34,241 accumulated | $11,304 saved |
| Principal | $45,000 accumulated | $45,000 paid back |
| Total | $79,240 | $11,304 |
Mortgage rates are currently at historic lows, so paying off your mortgage faster is probably not the best strategy. You wouldn't save much on interests and you would limit your saving capacity. Instead, you should take this opportunity to set up an emergency fund to deal with unexpected events and give you peace of mind. You could also invest in an RRSP or TFSA, to benefit from the advantages offered by these plans and finance another project.
To help you make an informed choice based on your needs and financial situation, contact your mortgage advisor. They'll help you make the best decision for you.
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