How Do You Pay Off Your Mortgage Faster?
Is your financial situation stable and do you want to pay off your mortgage faster? Read this article to discover the benefits and the different ways you can do so without compromising your quality of life.
1. Why Pay Off Your Mortgage Faster?
By paying off your mortgage faster, you’ll reduce the length of your mortgage and pay less interest. The result? You’ll enjoy unparalleled peace of mind as you pay off what will likely be the largest debt of your life.
Before taking such steps, however, it is
recommended that you have a stable financial situation. This can include an
emergency fund equal to three months’ worth of expenses, other forms of savings
- such as an RRSP or TFSA - and the absence of higher-rate debt[1]. However, the timing may not be ideal if you need to fund your
children’s education or are preparing for retirement, for example.
2. How Do You Pay Off Your Mortgage Without Penalties?
Paying off your mortgage faster doesn’t
always mean you have to pay penalties. Here are three easy ways to do it!
Increase the Size of Your Payments
If you have the option of increasing your regular payments without jeopardizing your financial situation, do it! This will allow you to pay off more of the capital, save on interest and reduce the length of your mortgage[2]. However, your mortgage contract may include certain conditions, so make sure you know about them to avoid penalties. Furthermore, be aware that if you increase your payments, you will most likely not be able to reduce them before the end of your loan term[3].
Accelerate the Frequency of Your Payments
You can also change the frequency of your payments. For example, you could go from paying $1,000 a month to $500 every two weeks or $250 a week. This will increase your annual payment, which will shorten the term of your loan, while saving you money on interest. By choosing this option, you could make up to one extra monthly payment per year[4].
Making Prepayments
A prepayment is
an unscheduled payment that you make in addition to your regular payments to
reduce your loan. It can be a tax refund, a performance bonus, or an unexpected
inheritance, for example. Most financial institutions allow additional payments
of between 10% and 25% of the capital[5]. Beyond that - or depending on other conditions - you may have to
pay a penalty fee. Your contract will specify the maximum allowable size of
these payments, including when you can make them: before the end of the term,
at maturity, at specific dates during the term, or at certain other times
specified in the agreement[6].
3. What Is an Open Mortgage?
Unlike a closed mortgage, an open mortgage
allows you to pay off all or part of your loan at any time without penalty[7]. However, open mortgages usually have higher interest rates, which
could work against you. However, this option can be advantageous if you plan to
sell your property before the end of the loan term or if you believe you can
make several large payments fairly quickly.
4. Is It Advantageous to Obtain a Discharge When the Mortgage Is Paid in Full?
Once your mortgage is paid in full, you can
request a discharge.
This does not represent your loan, but rather an agreement that your property
is being held as security for the loan.
If you wish to obtain a discharge, you will have to pay a fee. Also, you will not be able to keep the line of credit associated with your loan. So, it’s a good idea to think about it if you’re planning to do some renovations that require short-term cash flow.
5. What Is Mortgage Insurance?
Mortgage insurance will cover your payments
if you are injured, seriously ill or if a spouse dies unexpectedly. This type
of coverage usually combines two types of insurance: term life insurance and
critical illness insurance. Ask your mortgage broker for more details on this
option.
Buying a home is probably one of the most important decisions you will ever make. Paying off your mortgage sooner will free up a significant financial burden so you can focus on what really matters: spending quality time with your family, exploring the world or pursuing new passions. To make this easier, talk to a mortgage broker or a financial advisor who can give you the best advice for your situation.
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