With a prime rate of 4.70% in Canada, mortgage interest rates are on the rise, making home ownership increasingly unaffordable for many Canadians. So it’s no surprise that rising interest rates have made some landlords want to pay off their mortgage quickly to reduce the impact of this cost.
As with any financial decision, it is important to take the argument out of the discussion and think of a strategy that will serve you the best possible service in the short and long term. Paying more than the monthly amount can help. This reduces the total interest payable and may reduce the amortization period by a few years. But while paying off what may be your biggest debt may seem like the best way to reduce your anxiety when times are tough, it’s not necessarily the best use of your hard-earned money.
To Pay Off Your Mortgage, Are Prepayments The Best Strategy For You? Here are some factors to consider:
Understand the terms of your mortgage
If you plan to make additional payments monthly or annually, it is important that you understand the terms of your mortgage. For example, is there a penalty for paying more than the specified monthly amount? Is your mortgage open or closed? Open mortgages have an option for additional payments and closed mortgages do not, except sometimes under certain conditions. If you have the option of making additional payments, are they flexible or only during predetermined periods such as the end of each year of your term? Is there a limit to the amount you can pay up front? Before setting up a prepayment plan, carefully review the terms of your mortgage to avoid penalties.
Opportunity cost of prepayment
Homes are expensive and part of your debt is becoming more expensive with higher interest rates. If you are fortunate enough to have more money to invest in your mortgage, it is important to first evaluate your alternatives to make sure you get the most out of your money. Paying off principal and reducing interest is beneficial, but what if your money is earning more elsewhere?
For example, if you have three years left until the end of your term and want to set aside $10,000 to pay off your mortgage, you can save about $600 in interest (at a flat rate of 2% if you parked your mortgage earlier than that year). ). Now, consider 4% GIC (not unusual these days): your return will double to about $1,200. An alternative strategy could be to put your money in the GIC for three years and use the proceeds as a lump sum when you renew your mortgage.
There are plenty of other ways to get more out of your money, including paying off high-interest debt like credit card debt or finding tax shelters like an RRSP or TFSA. Although there are no guarantees, bear markets may be the ideal time to buy “discounted” stocks.
Although this may seem obvious, it is also worth noting that dumping every penny in your mortgage means that it may not leave you with enough money to meet other obligations. For example, do you have funds set aside to cover emergencies? Are you on the right track to reaching your retirement goals? Do you have big expenses like travel or health costs in mind? It is important to consider all of your short-term goals or expenses before making advance payments.
When interest rates rise, it seems that the goals to be achieved are becoming more and more distant. But it is important to take a step back. Real estate is just one piece of the financial puzzle, and because of its sheer size (both physical and financial), it tends to eliminate other investment avenues worth considering as well. As with any big financial decision, do your research, talk to an expert, and make the decision that best fits your financial goals.
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