Accelerating the repayment of a debt that is accumulating interest is always a good idea.
However, you must know how to do it in the most judicious way to prevent risks to your financial future.
Some individuals, seeing this significant debt threaten their bank account, decide to do everything to eliminate it at all costs.
Here is a guide you can use for the prepayment of your mortgage.
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Before paying off your mortgage in advance, it is essential to have a plan.
Ask yourself, “Is it really important to pay off the mortgage right away?”
Firstly, check if your mortgage rate is worth all the trouble of wanting to repay this debt first.
Historically, interest rates in Quebec have been low, therefore, you may decide you want to pay for another debt first.
For example, a credit card amassing arrears or a personal loan will often have much higher interest rates than a mortgage.
Consider all options before embarking on the most expensive option.
Pay debts that generate the highest interest today.
This will save you money in the long run.
Act wisely too, by saving money as an emergency fund, to be used if something should happen to you or if a sudden expense should surprise you.
Think of a savings account or even an RRSP.
If you decide to proceed with a prepayment of your mortgage, the benefits of eliminating the interest of the loan are numerous.
To guide you to the best approach to follow, here are some techniques that you can use to free yourself of this financial burden.
Depending on the agreement you have with your financial institution or lender, you are eligible to make an additional payment annually.
This amount cannot exceed 20% of your initial capital. Thus, it is possible to settle your mortgage in 5 years.
Many mortgage lenders do not offer this benefit for their customers.
Check with your lender if this option is available to you.
Example: A $300,000 mortgage initially will have the option of early repayment of $60,000 a year.
To use the Mortgage calculator offered freely from the Canada Mortgage and Housing Corporation and get an idea of how much you can save.
Depending on how you make your payments, you can double your payments.
If you pay the minimum amount every two weeks, the availability to repay your mortgage twice as fast is available to you, without penalty.
Does your contract give you this option?
When in doubt, speak to your bank or lender.
Note that if you combine this repayment technique with the previous one, under no circumstances should you exceed a total of 20% annually of your initial capital.
Example: If you pay $800 every month for your mortgage, you can pay $1,600 a month to pay off your debt faster.
With every renewal, you can ask to reduce the term of your mortgage.
Of course, your payments will be adapted to your new situation.
A note will be added to your agreement that will block negotiations for 5 years.
Before changing the period you have left, be sure of your financial position.
Five years can be a long time!
See an example below.
Example: The price of your mortgage is $213,750 with a 3% interest rate over 25 years. Your payments are $1,052.03 per month. You decide to reduce your mortgage term to 15 years. Your payments will now be $1,533.18 per month. Can you afford a 150% increase in your mortgage payments for the next 60 consecutive payments?
This option is the most effective and accessible.
Rather than reducing the loan term, see if you can just contribute a little more to your bi-weekly or weekly payments.
By adding a few dollars each time, you will save a fortune in the long run.
Example: For a loan of $300,000 payable over 25 years with an interest rate of 3%, you will have paid $125,920.95 in interest. If you decide to make accelerated weekly payments, you can save $16,226 in interest and pay in 22 years. This amount is no small thing.
With this list of repayment options enumerated above, you are now aware of the most advantageous techniques for you.
Do not put at risk the future of your family just to accomplish your goal!
You can buy a piece of your freedom without having to get out of debt too quickly.
As the Latin proverb says:
“To retreat to come back to the charge is prudence and not cowardice.”
If you are still wondering which of these 4 methods described above would be most beneficial for you, you can also speak to a financial expert for advice.
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