Buying real estate is often considered a good investment. For some homeowners, paying off their mortgage over up to 25 years is too long. Many therefore choose to repay it more quickly. Are you wondering if this option is advantageous for you? Here are our tips.
Accelerating the repayment of your mortgage loan saves you interest costs and reduces the duration of your loan.
Since a mortgage is usually the biggest debt in life, getting rid of it also brings peace of mind and a sense of accomplishment.
3 Ways to Pay Your Mortgage Faster
There are several ways to pay off a mortgage faster. Here are the 3 main options available to you.
Increase the frequency of your payments
How often you make your payments affect how long your mortgage will be paid off. With a weekly or bi-weekly frequency, your loan is repaid faster, because the equivalent of an additional monthly payment is then repaid each year. You repay the borrowed capital faster and you save on interest.
Make prepayments
An occasional cash flow can be used to prepay your mortgage loan. This could be a tax return, an inheritance or an annual bonus, for example.
During the same calendar year, the amount that can be repaid quickly and without penalty on your mortgage loan is generally limited to 10% of the principal amount borrowed. However, some fees may apply.
With early repayments, your borrowed capital is repaid faster and you save on interest.
Here is an example of saving interest for a mortgage loan where the payments and the interest rate remain constant throughout the amortization:
Make additional payments
To each principal and interest payment, you can add up to 1 times the amount of your payment. This way you can repay your loan faster.
With these additional payments, you also repay the borrowed capital faster and you save on interest.
Things to consider before paying off your mortgage faster
The money used to pay off your mortgage faster cannot be used for other purposes. That’s why financial advisors recommend homeowners ensure that the following conditions are met before proceeding with accelerated repayment:
You have an emergency fund representing at least 3 to 6 months of expenses in order to meet your needs if necessary. This amount of money set aside should not be used to accelerate the repayment of your mortgage loan.
You hold other forms of savings.
Accelerated repayment of your mortgage will not affect your other financial goals (paying for your children’s education, buying a second property, etc.).
You do not have debt at a higher interest rate than your mortgages, such as a personal loan or a credit card. It would then be more advantageous for you to pay off your debts with the highest interest rates first because they are the ones that cost you the most.
Scenarios to help you in your choice
While getting out of big debt faster is appealing, going all out to pay off your mortgage as soon as possible isn’t necessarily the best strategy.
Consider whether accelerated mortgage repayment is the best scenario, given your personal circumstances.
For example, a self-employed person with variable incomes could decide to take advantage of a few fruitful years to accelerate the repayment of his mortgage loan. It would thus lighten its future financial burden in view of possible more difficult periods.
A homeowner close to retirement could decide to pay off his mortgage more quickly while he is still on the job market. When his cash inflows drop, he will have fewer expenses.
By reimbursing his house more quickly, an owner anticipates the moment when he can refinance it in order, for example, to renovate it or to buy a rental property.
You also have to consider the state of the market. For example, if mortgage interest rates are high and market yields are low, paying off your mortgage quickly becomes attractive. On the contrary, if the market offers higher returns than interest rates on mortgages, investing might be a better option. Here is an example allowing you to compare an amount placed in savings with the same amount used to pay off a mortgage loan more quickly.
In the current environment where mortgage rates have reached historic lows, paying off your mortgage faster would probably not be the best strategy. You would not save substantially on interest and you would be limited in your ability to save. Instead, you could take the opportunity to build up an emergency fund to deal with the unexpected and ensure your peace of mind. You could also invest in an RRSP or a TFSA, for example, in order to benefit from the advantages of these plans and take advantage of them to finance an important project.
