Should you rush to pay off your mortgage?

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With the prime rate at 4.70% in Canada, mortgage interest rates are on the rise, making home ownership increasingly unaffordable for many Canadians. It is therefore not surprising that the rise in rates has aroused in some owners the desire to pay off their mortgage quickly to reduce the impact of this cost.

As with any financial decision, it is important to take the heat out of the debate and think regarding a strategy that will do you the best possible service in the short and long term. Paying more than your monthly amount can help. This reduces the total interest payable and may even reduce the amortization period by a few years. But while paying off what is probably 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 a mortgage, are prepayments the optimal 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’s important to understand the terms of your mortgage. For example, is there a penalty for repaying more than the established 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 do have the option to make additional payments, is it flexible or only during predefined periods like the end of each year of your term? Is there a limit to the amount you can prepay? Before working out a prepayment plan, carefully review the terms of your mortgage to avoid penalties.

The opportunity cost of prepayments

Homes are expensive and the portion of your debt has become more expensive with rising interest rates. If you’re lucky enough to have more money to put towards your mortgage, it’s important to first assess your alternatives to make sure you’re getting the most out of your money. Paying back the capital and minimizing the interest is helpful, but what if your money is earning more elsewhere?

For example, if you have three years left until the end of your term and you want to allocate $10,000 towards paying off your mortgage, you might save regarding $600 in interest (at a fixed rate of 2% if you have blocked your mortgage before this year). Now, consider a 4% GIC (not unusual these days): your return will double to around $1,200. An alternative strategy might be to put your money in a three-year GIC and use the returns as a lump sum payment upon renewal of 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 might be the perfect time to buy “discounted” stocks.

Maintain liquidity

While this may seem obvious, it’s also worth noting that sinking every last penny into your mortgage means it may not leave you with enough money to meet other obligations. For example, do you have money set aside to cover emergencies? Are you on track to reach your retirement goals? Do you have big expenses like travel or health costs in mind? It’s important to consider all of your short-term goals or expenses before making prepayments.

When interest rates rise, it seems that the objectives to be achieved become more and more distant. But it is important to take a step back. Real estate is only one piece of the financial puzzle, and because of its sheer size (both physical and financial), it tends to wipe out other investment avenues that also deserve consideration. we look into it. As with any major financial decision, do your research, talk to an expert, and make the decision that best suits your financial goals.