With Canada’s federal funds rate at 4.70%, mortgage rates are rising, making home ownership increasingly unaffordable for many Canadians. So it’s not surprising that the rise in interest rates has made some homeowners want to pay off their mortgage quickly to lessen the impact of these costs.
As with any financial decision, it’s important to de-escalate the debate and come up with a strategy that will best serve you in the short and long term. Paying more than your monthly amount can help. This reduces the total interest payable and can even shorten the payback period by a few years. But while paying off what is probably your biggest debt may seem like the best way to reduce your anxiety during tough times, it’s not necessarily the best use of your hard-earned cash.
Do you think prepayment is the best strategy for paying off a mortgage? Here are some factors to consider:
Understand the terms of your mortgage
If you plan to make additional monthly or yearly payments, it’s important to understand the terms of your mortgage. For example, is there a penalty for repaying more than the set monthly amount? Is your mortgage open or closed? Open mortgages have an option for back payments and closed mortgages don’t, except sometimes under certain conditions. If you have the ability to make additional payments, is this flexible or only during pre-determined periods such as the end of each year of your tenure? Is there a limit to the amount you can pay in advance? Before devising a prepayment plan, carefully review the terms of your mortgage to avoid penalties.
The opportunity cost of upfront payments
Houses are expensive and part of your debt has become more expensive as interest rates have risen. If you’re lucky enough to have more money available for your mortgage, it’s important to review your alternatives first to make sure you’re getting the most bang for your buck. Paying back principal and minimizing interest is helpful, but what if your money is earning more elsewhere?
For example, if you have three years until your term expires and you want to spend $10,000 on paying off your mortgage, you could save about $600 in interest (at a 2% fixed rate if you foreclosed on your mortgage beforehand). to have). Year). Now consider a GIC of 4% (not uncommon these days): your return will double to around $1,200. An alternative strategy could be to put your money in a three-year GIC and use the proceeds as a one-off payment when you renew your mortgage.
There are many other ways to get more from your money, including paying off high-interest debt like credit card debt or seeking tax breaks like an RRSP or TFSA. While there are no guarantees, bear markets could be the perfect time to buy “discounted” stocks.
While this may seem obvious, it’s also worth noting that sinking every last penny into your mortgage means you may not have enough money to meet other obligations. For example, have you saved money for emergencies? Are you on track to achieve your retirement goals? Do you have large expenses such as travel or healthcare costs in mind? It’s important to consider any of your short-term goals or expenses before making any upfront payments.
As interest rates rise, the targets seem ever further away. But it’s important to take a step back. Real estate is just one piece of the financial jigsaw, and because of its sheer size (both physical and financial) it tends to crush other investment opportunities that also deserve consideration. As with any important financial decision, do your research, speak with an expert, and make the decision that best meets your financial goals.