It is the dream of every Canadian to have their own house or property where they can spend the rest of their lives happily raising future generations. However, in these economically oppressing times, buying property, especially in Canada, is becoming exceedingly difficult.
However, with rising interest rates, many Canadians are now facing mortgage plans that last for 50+ years and in some cases even 90 years. This type of long-term debt can be extremely unnerving as during this long tenure if you are ever unable to pay mortgage payments on time the lender can exercise the right to take away ownership of the property.
It is no wonder that many Canadians today are stressed about their mortgage payments and are finding ways to pay off this debt as quickly as possible to avoid any future problems.
In this article, we will look at effective strategies to help you pay off your mortgage as early as possible and why you should or shouldn’t take this course of action.
The Benefits & Drawbacks of Paying Off Your Mortgage Early
Homeowners can also potentially save thousands of dollars that they would otherwise have had to pay in interest if they do end up paying their mortgage early.
Paying off your mortgage early can also help your credit score which makes it easier for you to secure long-term lower interest-bearing loans in the future.
Paying off your mortgage also means that you now have 100% equity in your property and can leverage your home as an asset to secure even more funds in the future if needed.
The only drawback to paying off your mortgage early is the potential of incurring repayment penalties. Some lenders can charge you a fee for paying off your mortgage before the intended period as this cuts into their profits. While repayment fees can often be a small percentage of the outstanding balance, this can amount to a significant sum depending on how much is still owed.
Effective Strategies For Paying Off Your Mortgage Early
If you plan on paying off your mortgage as early as possible you need to be careful. In some cases, it might be more beneficial to not pay off your mortgage early. Thus, keep these strategies in mind when considering early mortgage payments.
Understanding Your Mortgage Policy
Getting a firm grasp of how mortgages work can be tricky for most people, but you should try your very best to understand all the terms and conditions of your mortgage plan.
For starters, a mortgage is a loan used to buy land. By signing a legal agreement between the buyer and the lender, the buyer agrees to pay the lender the borrowed sum over a certain amount of time. This repayment is often in the form of monthly payments which are amortized, meaning that earlier payments go towards paying off interest while later payments go towards paying the principal.
There are also two types of mortgages in Canada. A fixed-year mortgage allows homeowners to own a mortgage policy that has a fixed interest rate and mortgage payments for a five-year term. The other type of policy is a variable-rate mortgage where interest rates can vary depending on economic factors.
The key to paying off your mortgage early is understanding what type of mortgage policy you have and how you can apply extra payments toward the principal.
Pay More Than The Monthly Amount Due
To help pay off your mortgage sooner, consider making higher mortgage payments. So, for example, if your mortgage is $1,436.46 per month round that up to $1,500. By paying an additional $60+ per month you can reduce the repayment period by a year or more helping you save money on interest and shorten your term duration.
Refinance Your Mortgage To A Shorter Term Length
If you find your income has increased and you can pay higher monthly payments look to refinance your mortgage to a shorter term.
Refinancing mortgages means replacing your previous mortgage with a new one with a different interest and principal rate.
By refinancing to a shorter term, your monthly payments will increase but your term duration will decrease. This can help you save a ton of money on interest and can help you free up more cash flow in the future.
Making Additional Large Payments
If you can’t pay more every month you can choose to make a couple of large lump sum payments every year to help you pay off your mortgage sooner. If you feel you are going to get a decent tax return, or are promised an annual bonus, you can use those funds to pay off your mortgage.
However, always make sure that these additional payments go towards paying off the principal amount and not interest. Make sure you contact the lender to ensure this is the case.
Recast Your Mortgage
Recasting is a great way to lower your monthly mortgage payments. Using this strategy you make one large lump-sum payment toward your principal balance. The lender will then reamortize the mortgage to reflect the new principal balance causing your monthly payments to decline and helping you save interest over the life of the mortgage.
Recasting a loan might involve a small fee, usually a couple of hundred dollars. In most cases, paying this fee is a lot more beneficial as the interest savings alone can add up to a substantial amount.
When Considering To Pay Off Your Mortgage Early Always Consult With The Experts!
Paying off your mortgage early can be both beneficial in some cases, and not so beneficial in others. It all depends on your current financial situation and your future financial goals. As such, if you are considering paying off your mortgage early, always consult with a financial advisor or a wealth management expert such as the ones at Eastport Financial.
Our expert advisors specialize in a wide array of financial services and can help guide you to making the right decisions when it comes to investing and retirement planning.