Can You Pay Your Mortgage Off Early? (2024)

Is this realistic or am I dreaming?

In this case, it is a struggle, but it is real. I don’t have current stats for you. But, in 2016 Statistics Canada reported that 63 percent of Canadian families owned their homes. But get this – they also reported that 43 percent of Canadian homeowners had paid off their mortgages. Huge numbers when you think about it.

So, you cannot only imagine home ownership, but you can also imagine a free and clear home one day. Truly one of life’s greatest moments and accomplishments. Everything feels different when you walk into your free and clear home for the first time.

But how can you possibly think about paying off a mortgage when you are stuck with a 25, maybe 30-year amortization, a large mortgage payment, other expenses, and a family to raise? How can you pay off your mortgage early with all these hurdles?

Don’t worry. If you want to drive in the mortgage-free lane one day, we can show you how to get there. Promise, not making this stuff up either. We have shown many and have seen many accomplish this feat.

It’s always more important to have a roof over your head and to pay the bills. So, not saying you should obsess about this. But I am saying that 25 or 30 years is too long and therefore you should be looking at ways to positively impact this scenario.

Pay Off Your Mortgage Early Methods

First, you must get in the mindset that every dollar you add to your regular mortgage payment matters. Every dollar.

• Every dollar brings down the balance of your mortgage
• The following payment, interest is calculated on the remaining balance, not on the previous balance.
• This means, for every future payment, the interest is lower, and the principal is higher than it would have been without your pre-payment.
• Every pre-payment you make affects all future payments of your mortgage. Not just the present one and not just by lowering your balance.

Some get discouraged when they can’t make substantial lump sum payments each year and then, do nothing at all. Instead, remember, even the equivalent of just one extra payment per year can save thousands of dollars in interest and pay your mortgage off years faster.

Below are some ideas that can help you pay that mortgage off faster.

Concept

The single most important thing to understand if you want to get aggressive in paying your mortgage off faster and earlier is – Amortization. You need to get your head around amortization. This is “not” the term of your mortgage. Rather, amortization is the length of time (months/years) it would take to pay your mortgage down to zero – assuming the interest rate and payments remained constant for the full amortization period.

Most of us start with a 25- or 30-year amortization. So, this simply means that if you made the same monthly payment for 25 or 30 years, your mortgage would be paid off in full.

Therefore, to pay the mortgage off faster or early, we must “shrink” this period somehow. This is what we are going to cover for you.

Additional Payments (Lump Sums)

With additional payments, you drive. You are fully in control of your extra payments, not the lender.

Most mortgages will have pre-payment privileges of some sort. However, some will only allow pre-payments once per year, usually on the anniversary date. Some will allow a pre-payment of a minimum amount on any payment date. Most will have an annual maximum.

So, based on your mortgage and privileges, plan it out. How much can you afford per payment, per month, per year, or whatever the case is? Then arrange that payment with your lender.

Make sure your lender applies the payment directly toward the principal balance and not toward a future payment.

Always ask your lender for an updated amortization schedule after you have made the payment or something to confirm how it was applied. You need to know going forward that your balance is lower and that every future payment will have lower interest and higher principal being applied.

With additional payments, if you are allowed to make them, you may be able to set them up as recurring. Meaning your lender will automatically take an extra amount with each payment until and if you tell them to stop (or start). This makes it easier as you set it and forget it and if you run into a crunch, you can stop it temporarily.

So, you can accomplish the same thing as a lender-controlled program (i.e. – accelerated payments) on your own and frankly, do a much better job at it. That said, you need to have the discipline to carry it out. If not, use the lender programs.

Accelerated Payments

Here I want you to be careful and have full clarity. If you intend to pay off your mortgage faster, then you must be certain that your lender provides, and that you chose either a bi-weekly accelerated option or a weekly accelerated option. A regular bi-weekly or weekly payment will “not” pay your mortgage off any faster. It must be accelerated.

Most new mortgages are set up with monthly payments as the default. However, you may have other mortgage payment frequency options. Choosing one of the accelerated frequency options will shorten your mortgage’s amortization and save you thousands of dollars in interest and years of payments.

Again, we are “not” going to deal with all of the payment frequencies here (monthly, semi-monthly, bi-weekly regular, bi-weekly accelerated, weekly regular, weekly accelerated). Rather, we are going to focus only on the accelerated options which will shorten your amortization and pay your mortgage off faster.

Bi-Weekly Accelerated: With a bi-weekly accelerated option, your monthly payment is simply divided by 2. You then make 26 payments in a year instead of 12 monthly payments. This equates to one full extra monthly payment per year.

Weekly Accelerated: Same as bi-weekly accelerated, however, the monthly payment amount is divided by 4. You will make 52 payments per year. The result is the same. One extra monthly payment per year.

The result will vary, but you can expect to shrink your amortization by 3 to 4 years. If you multiply that out, the savings are very substantial.

Renewal Strategy

I cannot tell you how many times clients simply sign off on their renewal without any other consideration. I realize times are busy. I realize the path of least resistance is the most convenient. But this is your mortgage people! It’s not only the time to shop for the best rates, but also the time to re-visit your repayment strategy.

My rule of thumb is to try to bring down your amortization by 2 years or more with each renewal or every 5 years, whichever comes first.

So, if you started with a 25-year amortization, at renewal, you are down to 20 years. If you have been paying weekly or bi-weekly accelerated, it will be less than 20 years. If you have made any prepayments, it will also be less than 20 years.

Hoping income has stabilized some for you and you have a bit of surplus cash flow. Whatever the remaining amortization is, renew for 2 years less (or more if you can afford it). The impact is huge.

Refinance

If during your mortgage term, you are ever able to refinance at a lower rate, it may be worthwhile. Of course, you will need to factor in pre-payment penalties, closing costs, etc. to see when you would break even. That’s a different article.

But assuming the new rate is very attractive, and you will be breaking even quickly, then why not? But, instead of lowering your payment and increasing your amortization, you will be maintaining your current payment and lowering the amortization.

Downsize

Considered drastic, but for some, it’s the logical next step. And if it is, it makes sense to execute this plan sooner rather than later. Then, use the profits to buy a smaller, less expensive house. This can often lower your mortgage substantially or pay the mortgage off entirely.

Frequently Asked Questions

Does paying off my mortgage affect my taxes?

The simple answer, on an owner-occupied property, it should not. However, if it is an investment property, consult with your accountant or tax advisor first.

But even with an investment property, your tax deduction would not be dollar-for-dollar. So, you would pay more in interest than you can save in taxes.

Does paying off my mortgage affect my home insurance policy?

No. You should still have the same coverage at the same costs. Unless your lender had any unique requirements, paying off your mortgage should not affect your home insurance policy.

Should I pay off my mortgage with my RRSP?

No. You might have a ton of cash sitting in your RRSP. But no, it should never be used to pay off your home. You will be taxed on that money as income. That is not the purpose of the RRSP. You would lose money to gain money. Makes no sense.

Last But Not Least – Our Friendly Advice

Paying off your mortgage saves on interest, eliminated the monthly payment and you own the home free and clear. I can’t think of too many cons.

You can still use the equity for many other things if you wish, including the acquisition of appreciating assets.

Your financial advisor, tax planner, or accountant may advise you against paying your mortgage off early. However, sometimes life is not about looking at a spreadsheet. Sometimes it’s just about what feels right for you.

No matter what, a free and clear home is a major accomplishment.