Early repayment of the mortgage: is this a good idea?
The purchase of real estate will undoubtedly be one of the most important investments of your life because of the costs involved and the time you will spend repaying the loan received from your financial institution.
In Quebec, mortgage loans that are insured with mortgage insurance can be amortized over a maximum period of 25 years. While this has its advantages, for some it is a length of time that may seem far too long. Many people therefore choose to pay their mortgage faster.
Speeding up your mortgage repayment: what you need to know
While getting off major debt still seems like an attractive choice, paying off your mortgage as quickly as possible might not be the best strategy for you. It depends on several factors including your financial situation, current interest rates, your plans and life goals ...
Paying off your mortgage early shouldn't come at the cost of your personal finances. There's no point in tightening your belt just to pay off your mortgage. Always keep in mind that the money you invest to pay off your loan faster cannot be used for other purposes.
Before making a decision, make sure that:
- You have an emergency fund or sufficient savings to support yourself for a few months in case of need
- You have other forms of savings
- The accelerated reimbursement will not affect your other projects (paying for children's education, preparing for your retirement, etc.) ;
- You don't have debt at a higher interest rate than your mortgage, whether it's a personal loan, credit card, etc. If so, paying off your higher-rate debt is likely to be more beneficial to you than investing in your mortgage.
The pros and cons of paying off your mortgage faster
If paying off your mortgage faster seems attractive to many homeowners, it is because it offers many advantages, including that of saving interest costs which represent a large sum in the long term. Prepayment also shortens the term of the loan and, in turn, generally brings peace of mind and a sense of accomplishment.
At the same time, paying off a mortgage faster comes with its own set of drawbacks. For instance, depending on the agreement you have with your financial institution, you may have to pay a prepayment penalty. This may occur if you've taken out a closed mortgage instead of an open one. You will therefore need to read your contract carefully to understand the penalties that could apply in the event of early payment.
5 ways to pay off your mortgage faster
There are several ways to speed up the speed of your mortgage repayment. Renewing your mortgage is a good time to review your contract and your repayment conditions. You can then try to renegotiate with your financial institution to adapt your payment terms to your situation.
Talk to your mortgage broker in advance about the various options available to you.
1. Choose a shorter amortization period
If this is your first mortgage or you need to acquire a new one, know that it is quite simply possible to reduce the amortization period. Rather than choosing a 25-year repayment term, you could decide to take out a loan for 20 or 15 years, for example, depending on the alternatives available from your lender.
Obviously, you will need to make sure you have the financial capacity to do this, since a shorter amortization period means that your payment amounts will have to be higher. However, this will allow you to accumulate less interest on your loan.
2. Increase the frequency of your payments
The frequency with which you make your payments can have a major impact on the length of your mortgage and the interest you will have to pay. If you have a regular income, it may be a good idea to synchronize your mortgage payments with your cash inflows to make it easier to manage your budget.
Does your mortgage contract provide for monthly payments? When you renew, you could opt for accelerated weekly or bi-weekly payments. By increasing the frequency of your payments, you will be able to pay off your mortgage more quickly, since accelerated payments pay off the equivalent of an additional month each year. You will thereby save on accrued interest without even increasing your monthly amount.
3. Increase the amount of your payments
Increasing your payment amount, even a few dollars, can have a big long-term impact on the speed of your repayment. If your budget allows, you could choose to allocate a small additional amount each month to your mortgage.
However, check your contract: your increase in payments could be limited to a certain amount each year. If you exceed the cost stated in your contract, you will incur penalty charges.
Also, make sure you can sustain the increase in the long term before making the change official. In general, financial institutions do not allow payments to be reduced before the end of your mortgage term following an increase.
4. Make advance payments
You could use an occasional cash flow (tax return, inheritance, year-end bonus, etc.) to prepay your mortgage. It is better, however, to check your contract before going ahead with this solution, as certain fees may apply.
This ability to make additional payments will vary depending on the loan you have taken out, among other things. An open mortgage offers more freedom for this than a closed mortgage.
In some cases, your financial institution may grant you an early repayment privilege to allow you to repay an additional amount, in addition to your usual payments. You can then increase your regular payments by a certain percentage or make a one-time payment.
5. Lower your interest rate
When renewing your mortgage, you may get a better interest rate. By keeping the same payment amount while having a lower rate, you will be able to pay off your loan more quickly, since a smaller proportion of your payment will go to the payment of interest.
Your ability to lower your interest rate will obviously depend on the market at the time of your renewal, but it is always possible to compare the offers of different lenders to find the best rate. Keep in mind, however, that if you decide to transfer your mortgage to a new financial institution to take advantage of a favourable rate, you may have to pay certain registration, discharge or other administration fees. You will therefore need to determine whether the financial advantages outweigh the disadvantages.
Do you want to know more about your mortgage? Read our practical guide to become a mortgage expert.
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