Fewer Canadians Are Paying Off Mortgages Early
A recent poll shows that the trend to pay one’s mortgage off earlier has slowed. In this study only 55 per cent chose to take action to pay down their debt faster. This percentage is down from 2013 when 68 percent accelerated their payment frequency. Allowing them to reduce their mortgage at a faster pace.
As well, those choosing to increase their payment amount diminished with only 28 percent opting to pay more each month. Compared to 42 percent the previous year.
This decrease is surprising as record low interest rates in Canada make this an ideal time to rewrite your mortgage to take advantage of the best possible terms. Even small changes can save you hundreds, if not thousands, of dollars in the long run.
There are many reasons to look at bumping up the frequency or the amount of your monthly payment. Paying off debt as quickly as possible is an all-round smart decision. Besides the obvious fact that the more you pay the less you owe, there are other factors you thinks about. Here are some things you may not have considered.
Your Home Will Cost You Less
While paying more may seem contrary to costing less, accelerated payments knock down the total amount owing. The amount left on your mortgage is what interest payments are calculated on. Lenders collect more interest at the beginning of your mortgage to get their money back as quickly as possible. Even though your payment stays the same each month, the amount that goes towards interest goes down and the payment against the principal (what you owe) goes up with each monthly payment.
So what happens when you pay more? It is a cascade effect. The extra money drops the amount of interest being paid, which increases the principal payment and then your balance drops faster. When the mortgage debt is repaid early, less interest is paid on the mortgage and the overall cost of homeownership is lower. If you are buying your home for the long-term or you are trying to build equity, accelerated payments are a great way to do it.
Mortgage-Free for Stability
As mentioned, paying off debt is always a good idea, but when you have paid off your mortgage completely it opens up many new possibilities. Lenders love to see equity sitting on a property and they are eager to lend against it. Equity gives you stability, even if the economy gets tough.
If you want to retire early, you need some start-up capital for a small business. Also, you could want to refresh your home down the road, being mortgage-free is a great advantage. Even if you just want to sit on your nest egg and enjoy the feeling of never having to pay another monthly payment. The ability to pay off your debt early will give you a sense of freedom and security. If your income changes for whatever reason, your family will still have a place to call home.
Future Generations
If you have a family, or you intend to have one, you may need some substantial cash down the road to send your loved ones to school. University or college is not cheap and having the luxury of a debt-free home can make financing a lot easier.
Even if you have made arrangements for school costs, extra money is always welcome around retirement time. You may want to take that cruise you always wanted to go on or visit a long lost friend living abroad. Debt-free living makes all of this possible. Also, it sets a good example to others in your family about how to manage finances well.
Investments
What would you do with the amount you pay for your mortgage each month if you no longer had that monthly expense? Can you imagine how much money you could save without that monthly bill hanging over your head? Clearly, savings and investments can accelerate once the mortgage is gone for good. You can amass a lot of money in a much shorter period of time when your biggest ongoing expense is eliminated.
Whether you have a mortgage or you are contemplating a purchase, it’s important that the mortgage you decide on is a match for your goals. Speak to an accredited mortgage professional to find out what your options are. Often times the penalty on an existing mortgage is trivial compared to the amount you can save with the right terms in place. If you are renewing, this is the ideal time to fine-tune your payments.