Is paying down my mortgage faster a good idea?

26 October 2022 by National Bank
Should I Pay Off My Mortgage Early Or Invest?

Your mortgage payments can be spread out over 25 years or more. For some homeowners that can seem like a very long time, which is why many people decide to pay off their mortgage early. Wondering what the benefits are and why it’s an option you may want to consider? Read on for our advice.

Why should I pay down my mortgage faster?

There are two main reasons for accelerating your mortgage payments:

  • The shorter your mortgage term, the less interest you’ll pay
  • Paying off the biggest loan of your life can bring peace of mind and a sense of accomplishment and freedom

A few points to consider before you decide to accelerate your mortgage payments

The money you use to pay down your mortgage faster is money you won’t be able to use for other things. That’s why it’s best to make sure you check off the following boxes before you accelerate your mortgage payments.

  1. You have an emergency fund that covers at least 3 to 6 months of expenses
  2. You have other savings vehicles such as an RRSP or TFSA
  3. You don’t have any debts with a higher interest rate—if you do, you should pay those debts off first
  4. You won’t compromise your other financial objectives, such as paying for your children’s education or investing more money

How can I avoid penalties when paying down my mortgage faster?

To accelerate your mortgage payments without paying a penalty, you have 3 options, each with their own characteristics and benefits.

They are:

Make more frequent payments

Without increasing your total payment amount, you could increase the number of payments you make in a month.

For example, you could go from monthly payments of $1,500 to:

  • Bimonthly payments of $750, or
  • Weekly payments of $375

By accelerating your payments, you could shorten the length of your loan and save money by paying less interest. You could pay every two weeks or every week instead of once a month, thereby paying the equivalent of up to one extra month each year. See how much you could save with our online tool:

Pro tip
Be sure to pick a payment frequency that’s aligned with your schedule. If you get paid every two weeks, for example, you could line up your payments with your payday.

Make bigger payments

Generally speaking, if you have a closed mortgage, you should be able to increase your payments by up to twice the initial amount (including principal and interest) without paying a penalty, which means you would double the amount of your payments. That means with each payment, you’d be refunding more of the principal and saving on interest.

These conditions can vary depending on your financial institution. For example, some lenders allow you to increase your payment amount as often as you like, while others only let you do it once a year for all the remaining payments in the year. Of course, you can always bring your payments back down to the initial amount.

Here is an example for a $300,000 loan at 2.50% over 25 years:

  • With monthly payments of $1,343.90 increased by $200 starting on the sixth year = $1,543.90
  • You would save a total of $11,716 in interest
  • And you would bring your loan term down to 21 years and 20 months

Make prepayments

A prepayment or lump-sum payment is an amount that you put towards your loan outside of the regular payment schedule. A windfall such as a tax return or an inheritance can be a good opportunity to make this kind of payment.

For closed mortgages, every calendar year you’re usually allowed to make prepayments worth up to 10% of the total principal amount borrowed.

If you go above that amount or infringe other conditions established by your lending institution, penalty fees may apply. Use our tool to get an estimate of the fees you’ll have to pay for your prepayment:

For more information on how penalty fees are calculated, see the entry on the Government of Canada website.

When your term expires, you can pay off as much of your mortgage as you'd like before you renew your loan.

Bonus option: An open mortgage

Unlike closed mortgages, open mortgages allow you to repay your mortgage in full or in part at any time without paying a penalty. The downside is that open mortgages usually have higher interest rates. So you need to be sure that the higher rate is worth it.

Pro tip
This type of loan can be a good option if you know from the outset that you’ll be selling your home before the end of the term or that you’ll be able to make one or more big lump-sum payments.

Should I discharge my mortgage once it’s paid off?

Making your last mortgage payment is always a source of relief. But your mortgage doesn’t simply disappear once you’re done paying it off. A mortgage isn’t just the money you borrow—it’s the agreement whereby you use your home as security to back a loan. This gives the lender the right to seize your property if you default on the loan.

Even once it’s paid off in full, discharging your mortgage isn’t always to your advantage. Here are two reasons to wait before discharging your mortgage:

  1. Avoid discharge fees: To be free of your mortgage, you need to get your lender to provide you with a discharge, which comes with a fee. The procedure and fee for discharges can vary depending on your province or territory of residence. Plus, you may need to work with a lawyer or notary, so you’ll need to pay for that as well.
  2. Keep your home equity line of credit:home equity line of credit allows you to borrow the amount paid on your mortgage at a competitive rate. You can use the funds to pay for renovations or other big projects, and you’ll only pay interest on the amount you use.

To help you make the right decision based on your needs and financial situation, it’s best to talk to a mortgage advisor. They’ll be able to provide you with the information you need to choose wisely.

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