Should You Pay Off Your Mortgage Early?

Should You Pay Off Your Mortgage Early?

Written by Caitlin Wood
Last Updated August 21, 2019

For most people, their home is the single most expensive investment they make in their lifetime. While paying off a mortgage early may seem like a prudent thing to do, there may be some reasons why it will hurt you and even cost you money.

Pros

1. You get to be debt free

Knowing that your home is paid off can be a great feeling and a load off your shoulders. Annual taxes and the maintenance fees will still be due annually, but your monthly mortgage payments will no longer be a burden. You will know that the bank can’t take away your house if an emergency strikes, which can be a huge relief.

2. You get to avoid paying interest

Home owners typically do not itemize their taxes and therefore do not reap the benefits of claiming interest on their tax returns. The interest rates are currently between 4.5% and 7%. Therefore, paying off the loan early can be beneficial because you will greatly reduce the amount of interest you will have to pay. It effectively reduces the amount you have to pay overall for your home.

3. You have lower expenses in retirement

Most people have to live off of a smaller income when they retire, and having no mortgage allows you to have fewer expenses and live more comfortably within your retirement income.

4. You have more equity

Paying off a mortgage early will help you build more equity in your home, which can be considered a giant emergency fund if you are in a situation where you need a large amount of cash. You can sell it and gain a large lump sum or get a reverse mortgage and take out that equity when needed.

5.You don’t have Private Mortgage Insurance (PMI)

Homeowners can stop paying a 0.5% mortgage insurance after they build up equity in the home. While this doesn’t sound like much, it can add up and be an unnecessary cost.

Cons

1. Your money is tied up in the house

If you pay off your mortgage early, you will not have that money in an easily-accessible location. Also, you will be unable to put your money into other methods of saving which may make you more than you will save by paying off your house early. Chances are that your house price will rise very slowly over the next few years, so your money won’t be multiplying the way it could in other accounts.

2. You may have to pay penalties

Mortgage penalties may be applicable if you pay off your mortgage early in Canada. Penalties may also apply if you renegotiate your interest rate terms. The first type of mortgage penalty is called an interest rate differential. The second type of mortgage penalty is the three-month interest rate penalty. The type of penalty owed will depend upon the type of mortgage that is offered at the time.

To avoid mortgage penalties, you should try to get an open mortgage, which will allow you to pay the full mortgage balance without incurring any penalties. Closed mortgages have restrictions on consumers paying off their balance in full, but consumers may obtain a lower interest rate. Therefore, if you think you want to pay off your mortgage faster, you should obtain an open mortgage with a higher interest rate to avoid penalties.

Remember that prepayment penalties can be between 10% and 20% of the mortgage with a closed mortgage. An open mortgage is preferred by real estate investors and others that want to pay off their homes in a short period of time. However, if you go for a lower interest rate and put your money into other investments, it is possible to make more than you are losing on interest. You just have to be comfortable with the situation and knowing that you will be making mortgage payments for a very long time. Ultimately, it’s up to you and what makes you more comfortable.

Caitlin is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security. One of the main ways she’s built good financial habits is by budgeting and tracking her spending through the YNAB budgeting app. She also automates her savings so she never forgets to put aside a portion of her income into her TFSA. She believes investing and passive income is key to earning financial freedom. She also uses her Aeroplan TD credit card to collect Aeroplan points so that she can save money when she travels.

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