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How quickly should you pay down your mortgage?

If you’re wondering if you should pay off your mortgage faster, you’re not alone. Your mortgage is a huge chunk of debt and many Canadians would love to see that number go to zero as soon as possible.

However, does it actually make sense to pay down your mortgage faster? If you have some extra cash, should you be putting it towards your mortgage or is your money better spent elsewhere?

Let’s dig into it.

 

What to consider

Most Canadians want to pay down their mortgage by retirement. That’s because they expect to be earning less in retirement and they want to keep their costs of living as low as possible.

Some are eager to be mortgage-free even sooner. You may have read a few news stories of people ditching their mortgages in their 30s and 40s. This has some people wondering if paying off their mortgage early is something they should be striving for.

Others are fine carrying a mortgage into retirement, preferring to invest extra cash as they feel it has a better return on their money.

As is always the case, personal finance is personal. The right choice for you will be the wrong choice for someone else. Here are a few things to consider to help you make your best decision:

 

1. Do you have any high-interest debt?

If you have high-interest debt such as credit card debt, the best use of extra cash is paying it off. We always recommend tackling credit card debt and other high-interest revolving loans, like your line of credit, before considering paying off comparatively low-interest mortgage debt.

 

2. Do you have cash available for unexpected expenses?

It’s super important to have cash on hand in an emergency fund. Life is unpredictable, and you never know when something will pop up that demands extra money. It’s good practice to have 3-6 months of living expenses in a savings account just in case. Especially as a homeowner, you need some money squirreled away for repairs and maintenance.

Once you put money towards your mortgage you won’t be able to get it back. You can’t access that cash again like you could if that money was in your savings or investments.

 

3. Are your investments on track for retirement?

Make sure you’re putting enough money away for retirement and any other long-term lifestyle goals before considering paying down your mortgage faster. This is also where tax-efficiency comes into play—putting extra money into a RRSP so that you get the tax refund may be more advantageous than paying down your mortgage. Talk to a Plan Pro to see what the best choice for you is.

 

4. How long away is retirement?

If you’re close to retirement (say 5 years away) and it’s important to you to be mortgage-free when you retire, it makes sense to apply any extra cash you have against your mortgage until then.

If you’re a long way out from retirement, it most likely makes sense to put extra money towards your investments. You’ll be able to make a higher return in the stock market than what you’re paying in interest on your mortgage.

 

5. What’s your risk tolerance?

This is where we remind you that money doesn’t boil down to math. Just because it may make more sense from a numbers perspective to invest your money rather than pay down your mortgage, doesn’t mean that’s the right choice for you. If you’re very uncomfortable with debt and think you would feel more at ease seeing that number decrease faster then, by all means, pay down your mortgage. Just make sure you have an emergency fund and that your savings are on track.

 

Ways to pay off your mortgage faster

If you’ve decided paying down your mortgage is the best choice for you and in line with your financial goals, here are some ways to make it happen:

 

1. Increase your regular payments

If you have room in your monthly budget, the easiest way to start paying down your mortgage faster is to increase your payments on an ongoing basis. Even an extra $100 or $200 per payment will go a long way to shorten your mortgage and help you pay less interest overall. The good thing about this strategy is lenders often let you turn these increases on and off. If your cash flow changes and things are a bit tight for a few months, you can go back to your original payment amount.

 

2. Use windfalls to make lump sum payments

Use your bonus, an inheritance, or any other windfall to make a prepayment. Most mortgages allow borrowers to make annual prepayments of 10% to 20% of the principle without extra fees. You’ll want to check the terms and conditions of your mortgage to know exactly what your prepayment privileges are.

Before implementing either of these strategies, always check in with your financial plan to make sure it’s the most impactful use of your money. If you’re not sure what the best choice for you is and you’d like to talk it through with a financial planner, book a free call with a Plan Pro. We’d love to help!

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