Paying off a mortgage early can be a tough decision for many homeowners. While it may seem like a smart financial move, there are various factors that should be considered before making a decision. In Canada, the mortgage industry is thriving and has seen many changes over the years. Before you make a decision, let’s understand how mortgages work in Canada.
How does the mortgage system work in Canada?
In Canada, mortgages have a set term length. This means that homeowners have a set amount of time to pay off their mortgage in full, typically ranging from 5 to 30 years. During this time, homeowners make regular payments on their mortgage, which typically includes both principal and interest. The interest rate can be fixed or variable depending on the type of mortgage you choose.
Are there any advantages to paying off your mortgage early?
1. Saves you a significant amount of money paid as interest
The longer you take to pay off your mortgage, the more interest you will pay. By paying off your mortgage early, you can potentially save tens of thousands of dollars in interest.
2. Provides you with better financial security
Once your mortgage is paid off, you no longer have to worry about making monthly payments or the risk of foreclosure if you fall behind on your payments. This can provide a sense of peace of mind and financial freedom.
3. Provides you a peace of mind
Paying off your mortgage early can also provide you with a sense of financial security and peace of mind. Without the burden of a monthly mortgage payment, you’ll have one less financial obligation to worry about. Additionally, if you’re retired or nearing retirement, knowing that you own your home outright can provide a sense of comfort and security, particularly during times of economic uncertainty.
4. Helps to improve your credit score
By reducing your debt-to-income ratio, you’ll be seen as a less risky borrower, which can result in a higher credit score. Additionally, paying off your mortgage early can help to establish a positive payment history, which is an important factor in determining your credit score.
Let’s talk about the disadvantages of paying off your mortgage early
1. Bites into your other potential investments
If you have a low-interest rate on your mortgage, it may not make sense to pay it off early. This is because the money you use to pay off your mortgage could potentially be invested elsewhere and earn a higher rate of return. Additionally, if you don’t have any other investments, paying off your mortgage early could leave you with a lack of diversification in your portfolio.
2. Makes more sense to pay debts with higher interest first
It’s also important to consider your personal financial situation before deciding whether to pay off your mortgage early. If you have other debts, such as credit card debt or car loans, it may make more sense to pay those off first before focusing on your mortgage. This is because these types of debt typically have higher interest rates than a mortgage.
3. It might not be worth spending all your savings on mortgage payments
It’s important to have an emergency fund in case of unexpected expenses or job loss. If you use all of your savings to pay off your mortgage early, you may not have enough cash on hand to handle these situations. It’s recommended to have at least three to six months’ worth of living expenses saved in an emergency fund.
4. You might not get tax credits
In Canada, mortgage interest is tax-deductible, which means that paying off your mortgage early could result in higher taxes. However, it’s important to speak with a financial advisor or tax professional to understand how paying off your mortgage early could impact your specific tax situation.
Deciding whether to pay off your mortgage early is a personal decision that depends on a variety of factors. While paying off your mortgage early can save you money in interest and provide greater financial security, it’s important to consider your personal financial situation, investment goals, and potential tax implications before making a decision.
If you’re currently paying a higher interest rate, get in touch with experienced mortgage broker Leo Ragusa. He’ll offer you the best mortgage advice for your situation and also help with refinancing your mortgage at a lower rate.
