Have you ever imagined what it would feel like to have your mortgage paid off in full? It’s the ultimate dream for countless homeowners all over the country. The thought of no longer having to worry about your biggest expense every month can feel like a tremendous relief. It also opens up options you may not have right now. Maybe you’d travel, invest, or finally make those home improvements you’ve been dreaming about for as long as you can remember. Few things are more appealing than the thought of being mortgage free. However, if you’re fortunate enough to be in a position to pay all or most of it off, there are a few things to consider.
Pros and Cons of Early Repayment
Being mortgage free can greatly increase your peace of mind. Your house is yours free and clear, and you never have to worry about foreclosure in the event of a job loss or illness. And think of all the interest you will save! Even if you managed to secure a mortgage at the lowest rate possible, you still end up paying thousands of dollars because of the sheer size of the loan. The ability to pay it all off keeps that money in your pocket. With all of the benefits of being mortgage free, it may be hard to believe there are also disadvantages. What are the drawbacks?
- Reduced cash flow. Paying off your largest debt calls for a celebration. But what happens if you have an emergency and need fast access to cash? Your home is your most valuable asset, but is not necessarily easy to liquidate. If you decide to pay off your mortgage, it’s best to ensure you still have an emergency fund set aside.
- Limited financial opportunities. Real estate is widely considered one of the safest and most stable investments. However, you could lose equity in the short term if the housing market falters. This is one of the reasons why many financial experts suggest diversifying your interests.
- Potential tax implications. If you divert your extra funds to your mortgage instead of RRSPs, you could miss out on the tax savings that sheltered investments provide.
Want to know more about mortgages and how they work? The following resources will be invaluable:
- Common First-Time Buyer Questions Answered By Mortgage Specialist
- Is Your Home Up For Financing? Here’s Everything You Need to Know to Get the Best Rate
- Straight Talk About Second Mortgages
What Are the Penalties for Early Payment?
Depending on your mortgage type and the lender, there may be stiff penalties for early repayment. These fees can apply to various situations, including:
- Paying more toward your mortgage than the permitted amount.
- Changing to a different lender before the end of your term.
- Paying off your mortgage entirely before your contract expires. This includes repayment after selling your home.
Early repayment penalties can work out to thousands of dollars. How are they calculated? Typically, your lender will charge you the equivalent of three months’ interest or IRD (Interest rate differential), whatever is the greater amount. The interest rate differential kicks in when the current rate is higher than what you’re paying and if you signed your agreement less than five years ago.
Tips for Avoiding or Minimizing Prepayment Penalties
Before doing anything, you should know what type of mortgage you have. For example, an open mortgage allows you to pay off your entire loan or make large lump sum payments at any time and with no penalty. The interest rate may be higher, but the flexibility can make up for it if you’re ever in a position to become mortgage free.
On the other hand, a closed mortgage often offers a much lower interest rate. However, you can get hit with expensive penalties if you decide to pay it off early.
And it isn’t just the type of mortgage to consider. You’ll want to look into the individual clauses and see what your options are. Often, you can find ways to minimize your repayment penalties:
- Read your mortgage agreement carefully before signing. The lender is legally obligated to disclose how they calculate your prepayment penalty and whether they offer any repayment privileges.
- A “repayment privilege” lets you pay a certain amount over and above your regular mortgage before you incur any penalties. You may not be able to pay off all of your loan, but you can make a dent!
- If you are relocating, try to work with your lender to transfer your mortgage to your new home rather than paying it off.
- In the worst-case scenario, simply wait until the end of your term so you can pay your mortgage off with zero penalties.
What should you do if you decide not to repay your entire mortgage? Becoming a real estate investor might be the perfect next step, and these resources will help:
- A Complete Guide to Real Estate Investing in Guelph
- Growing Your Wealth Through Real Estate Even in a Recession
- How An Experienced Guelph Real Estate Team Can Help With Your Investments
Benefit From the Best of Both Worlds
Paying off your mortgage in full might be the ultimate goal. Whether it makes sense depends on the type of loan, your financial resources, and the lifestyle you want to enjoy now and in the future. But you can still enjoy some of the benefits of early repayment, even if you don’t take care of your entire mortgage. Adding just a couple hundred dollars to your monthly payments can make a massive difference in how quickly you pay your principal. In the long run, you could save thousands of dollars in interest without leaving yourself short financially. A financial advisor or mortgage expert can advise you on the best course of action for your unique situation.
Do you want to know more about buying, selling, or investing in Guelph or the Tri-Cities? We are happy to answer any questions you have and to help you get started. Reach out to us today at info@gowylde.ca or call 519-826-7109 for more information.
