*This post was created in collaboration with Alpine Credits
Out of all the monthly expenses you have to pay, your mortgage payments are probably the highest. Given this, it might be worth trying to pay off your mortgage early.
But that may not always be the best course to take. Sinking all your money into your home might leave you with little available to do other things with it such as investing and saving for retirement.
So, is paying off your mortgage early in Canada worth it? Or should you leave your extra money to be put towards other expenses or investments?
Key Points
- You can pay your mortgage off early by making annual lump sum payments and switching to an accelerated bi-weekly payment schedule.
- If you pay your loan off early, you may be charged early prepayment penalty fees.
- Ensure any penalties you’re charged is worth the savings of paying your mortgage early.
Paying Off Your Mortgage Early In Canada
The first few years of your mortgage term can be financially draining, as most of the money you’re paying is going toward interest and not toward building equity. This will change as the years go on and you pay down your mortgage. But if you’re interested in building your equity faster, there are a few things you can do.
Here are a few ways to pay off your mortgage early in Canada:
Accelerated Payment Option
The average homeowner typically makes monthly mortgage payments, or 12 payments in a year. This means that if your mortgage payment is $1,500, you’re paying $18,000 toward your mortgage annually.
This is where the accelerated payment option can help you shave years off your mortgage term. The accelerated payment option allows you to make half-payments (so in the case of our example, $750) every two weeks.
One full year can be broken up into 26 payments, instead of 24. This means you’ll make 26 $750 mortgage payments in one year, which equals $19,500. That’s an extra $1,500 per year that goes towards paying your mortgage, which can help you pay down your loan faster.
Lump Sum Payments
A mortgage is a long-term commitment, typically 25 to 30 years. Making smaller extra payments over this period can add up in the long run, helping you pay your mortgage off sooner.
Many lenders allow borrowers to make a lump sum payment on top of the regular mortgage payments, which goes entirely to the principal portion. Not only are you shortening your amortization period, but you’re also saving on interest that you would have otherwise paid on these extra principal payments.
Refinance For A Shorter Amortization
When you refinance your mortgage, you may have the option to shorten the amortization period. For instance, if your current mortgage is amortized at 25 years, you can refinance to a 20-year amortization period. While your mortgage payments will increase because you have less time to pay your mortgage, you’ll be debt-free sooner.
Plus, if you can secure a lower interest rate when you refinance, you can save a significant amount of money in interest payments over the term of the loan.
| Pro Tip Speak with your mortgage lender. Set up a meeting with your lender to speak with them about your options. There may be a payment option you had not considered or some type of restriction. It’s always in your best interest to speak with a professional. |
Pros Of Paying Off Your Mortgage Early
When it comes to paying off your mortgage early, there are several advantages you should consider:
You’ll Be Debt-Free Sooner
Paying your mortgage off early means eliminating that hefty mortgage payment you work so hard to pay every month. This effectively makes you mortgage-free. And if that’s your only debt, you would be completely debt-free, too.
Otherwise, you can take that extra money that would otherwise be spent on mortgage payments and use it for other purposes, such as investing or saving.
Pay Less Interest
The sooner you pay off your mortgage, the less money you’ll pay in interest.
To give you an idea of how much you can save, let’s illustrate using an example:
- Mortgage amount: $400,000
- Interest rate: 4.0%
- Term: 5-year fixed
Now, let’s compare the interest paid between a 20- and 25-year amortization:
| 25-Year Amortization | 20-Year Amortization | |
| Mortgage payment amount | $2,104.08 | $2,416.99 |
| Interest over term | $74,460.52 | $72,506.83 |
| Interest over amortization | $231,224.25 | $180,076.61 |
As you can see, you could save $51,147.64 if you refinanced to a 20-year amortization period.
Now, let’s compare how much interest you could save by switching from a monthly to an accelerated bi-weekly payment schedule:
| Monthly Payment Schedule | Accelerated Bi-Weekly Payment Schedule | |
| Mortgage payment amount | $2,104.08 | $1,052.04 (every 2 weeks) |
| Interest over term | $74,460.52 | $73,231.46 |
| Interest over amortization | $231,224.25 | $198,495.87 |
In this example, you’d save $32,728.38 in interest over the life of the loan by switching to an accelerate bi-weekly payment schedule.
Lower Expenses In Retirement
With no mortgage to have to pay in your golden years, you can enjoy having more money readily available in your retirement. This is particularly important if you experience a significant reduction in monthly income after retiring.
More Home Equity
The more money you put into your home, the more equity you’ll accumulate. You can use that home equity at some point if you ever need a large sum of money to cover the cost of a major expense. For example, a home renovation, college tuition for an adult child, or another investment.
By taking out a home equity loan or home equity line of credit (HELOC), you can borrow against your home rather than take out a personal loan. Home equity loans are typically easier to get approved for and come with lower interest rates than unsecured personal loans. Plus, you’ll likely be able to get a larger loan amount based on the equity in your home.
Can You Get A Home Equity Loan With Bad Credit?
You can get a home equity loan or line of credit with bad credit, depending on the lender you apply with. For example, most traditional banks will turn you down, but an alternative lender like Alpine Credits won’t.
In fact, lenders like Alpine Credits base approval on the equity in your home, not your income level or credit score. If you want to know how much you qualify for a home equity line of credit, you can get a free quote too.
No Mortgage Default Insurance
If you make a less than 20% down payment you are required to pay mortgage default insurance on top of your mortgage payments. This premium is typically rolled into your mortgage payments.
You won’t be able to eliminate this insurance premium until the mortgage has been paid off. The sooner you pay off your home loan, the sooner you’ll be free from additional premium payments on top of your mortgage payments.
Cons Of Paying Off Your Mortgage Early
In addition to the perks of paying your mortgage off early in Canada, there are a few drawbacks that should also be considered:
Your Money Is Tied Up In Your Home
Sinking all your money into your mortgage may help you become mortgage-free sooner, but it could also mean you’ll have less to invest elsewhere. Before committing to paying off your mortgage early, crunch the numbers to compare how much you could save by being mortgage-free versus how much you can make with various investments. This will depend on the interest rate of your mortgage compared to the earning rate of an investment vehicle.
Your Retirement Savings May Be Affected
If you’re putting all your extra cash toward your mortgage and not investing enough in retirement savings, you may not be adequately prepared for retirement. You’ll see a reduction in monthly income when you retire, which is where accounts like RRSPs come into the picture to supplement your income.
If you haven’t invested appropriately throughout your working years and instead poured all your money into your mortgage, you could find yourself financially strapped in retirement.
A Mortgage Is A Low-Cash Savings Tactic
Putting money into your mortgage can be viewed as a form of forced savings. But there may be other avenues to save and grow your money, like Tax-Free Savings Accounts (TFSAs). Plus, tying up your money will leave you with little liquid cash that you may need in an emergency.
You May Have To Pay A Prepayment Penalty
If you have a closed mortgage, you may be charged an early repayment penalty if you pay off your mortgage before the term ends. You’ll want to find out if this fee applies in your situation, and if so, how much you would be charged.
Ideally, you should wait until the time of renewal to make changes to your mortgage to avoid any early repayment penalty fees, which can add up to a few thousand dollars.
Should You Pay Off Your Mortgage Early?
Everyone’s situation is different, so the right answer for you will not be the same for someone else. To help you determine whether you should pay off your mortgage early, consider asking yourself the following questions:
Do You Have Other Debts To Pay?
Consider all other debts that you are already paying down. Some may have a much higher loan amount than others. Even more importantly, some debts may have higher interest rates than others. If you have a slew of high-interest debts in addition to your mortgage, it might be best to focus on paying these down before paying off your mortgage early.
If you do decide to prioritize paying off your high-interest debt, consider the “avalanche debt method”, which involves paying down debts with the highest interest rate. With this method, you can usually save the most money because you’re essentially getting rid of high-interest debt as quickly as possible.
How Will This Affect Your Retirement Savings?
There are important things you may want to save up for, and your retirement fund is one of them. You want to make sure that you’ll be able to live comfortably after you stop working. And while you may be paid by the government after all those years of contributing to the Canada Pension Plan (CPP), you may want to top that up to accommodate your lifestyle.
So, consider how paying down your mortgage early may impact your retirement savings. Will your savings and income go toward your mortgage, leaving you with little to contribute to your retirement fund? Ideally, you should distribute your income in such a way that you’re paying down your mortgage at a healthy pace while also contributing to a retirement fund.
Why Do You Want To Pay Off Your Mortgage Early?
Think about why you want to pay your mortgage off early. Are you paying off your mortgage early to boost your monthly cash flow? If so, you’ll want to know how those extra funds will be used.
Or, do you want to invest? If that’s the case, make sure that whatever money you would otherwise be spending on your mortgage goes into a sound investment. At the end of the day, it’s up to you how you choose to spend extra money that once went to mortgage payments.
Bottom Line
If you want to pay off your mortgage early, there are a few ways you can achieve that. Just be sure to consider the costs of breaking your mortgage contract early. In some cases, the penalty fees associated with breaking your mortgage before the term ends outweigh any savings you’d gain by paying off the mortgage early. Do the math before you make your decision.
Mortgage
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