Paying Off Mortgage Early: The Realistic Guide

A mortgage is like your step-brother from the countryside that came to help with the renovation: he’s helpful, you couldn’t do it all alone, but if he decides to stay at your place for the next 30 years — you wouldn’t be happy. Here’s how to politely ask it to leave — paying off mortgage early — with methods that really work. 

Paying Off Mortgage Early — the Basics 

Paying off the mortgage earlier simply means paying off the final amount ahead of schedule. There’s no hidden meaning here. 

You know that the final payment is made at the end of 30 years, but if you want to get out of debt without waiting for it — you have some tricks that can help. 

And no, none of them is “get a second job”. It seems to be quite popular in the guides on the Internet, but we’re sure there are better ways. Also, it’s dangerously close to “sell your kidney”, so we’re not going there. Let’s stay realistic. 

Step Number 0: No Illusions

The most important thing with paying off the mortgage early is realizing that when you buy something on credit, you borrow money from the bank and agree to pay it back with interest. It’s like when you borrow money from your neighbor to buy a new car or if you ask your mom to lend you some money for a business idea. 

The lender in both cases expects to get paid back with interest in one way or another.

You should pay extra attention to exactly PAYING OFF your mortgage early — not trying to avoid it, dodge the interest rates from your contract, or run away to an underdeveloped country to live among the Jungle people. That’s simply NOT how it works. 

Here are the things that you can do with your mortgage to stay in the legal field: 

Step 1: See if You Can Refinance it 

Refinancing a mortgage can help you save some money. We can explain the idea in an example: let’s say that you have a mortgage with a rate of 4.5% for 30 years. Your mortgage amount is $100 000, and your monthly payment is $1300.

Your mortgage will be paid off in 270 months or 30 years. After that, you’ll have to pay the final payment of the whole amount, which will be around $100 000 + interest = $106 200. Refinancing your mortgage with a new lender will lower your interest rate and add more time to pay off the debt. 

The best way to refinance a mortgage is to get the lowest interest rates on the market and accept an advance of money against them — up to $2 000 extra per month, which will be called “the prepayment penalty”. I

If your budget allows it, you can even pay more than $2 000 extra per month: some lenders charge even more than that. If your current mortgage lender doesn’t want to play ball, you can always try other lenders. Make sure to shop around and get the best deal for you. 

Don’t forget that this is basically borrowing money against your home’s equity, so it’s important that you can actually afford it. Don’t refinance your mortgage if you don’t have enough income or savings.

Step 2: Check if you can pay more now regularly — to stop paying sooner. 

Extra payments are the most rational path to paying off a mortgage early. 

Here’s how it works: suppose you have a mortgage with a rate of 4.5% for 30 years. Your monthly payment is $1 300. If you decide to make an extra payment once a year, you’ll save nearly $2 000 on interest charges.

The same goes for extra monthly payments. You don’t pay an interest fee for every ahead-of-schedule payment — so why not go for it? 

The only drawback is, can you really afford it? According to statistics, a 25-year mortgage (the most popular option nowadays) may take over 50% of your whole household’s income. In some provinces — like Vancouver — this number can go up to a shocking 80%. 

Step 3: Is Recasting an option for you? When did you do it for the last time? 

Mortgage recasting is not so popular, but it’s still simple. Basically, you get a new mortgage and pay it off ahead of schedule. But rather than simply borrowing from the bank, you get a new mortgage from a different lender, take it to the bank and pay off your old one. In this way, you save money each month. 

You can also do this with home equity loans or lines of credit, but in these cases, you’ll have to sell your house to get rid of the debt. Not a good outcome. 

The good news is — you can recast again and again and refinance to a new mortgage with a lower interest rate and longer or extra payment terms. The more time passes — the less your total interest will be. 

Step 4: Make sure you don’t lose more while trying to save 

It’s a bonus point, but still necessary. Paying off your mortgage early has some risks: 

  • If you’re really unlucky and too brazen in attempts to cut the interest rates, the bank may send you a notice that your mortgage overpayment is about to expire or that your current mortgage cannot be refinanced into another lender; 
  • Another risk is missing an opportunity when trying to save for retirement or other goals. It’s not like the worst-case scenario, but a rat race against the bank’s whole lawyers team to save an extra $1000 may conquer your attention span and strip you from the little joys of life; 
  • Finally, and perhaps most importantly, you don’t want to end up in a situation when your mortgage is suddenly several thousand dollars more than you expected. And this situation — especially if you’re not that good with finance — may wait for you around every corner. 

Paying off mortgage early — the Final Question 

Is it possible to pay off your mortgage early? Yes. But is it smart to do so? 

You’ll probably save some money, but you step into a dangerous field. Make sure to be extra careful. Calculate how much you can save and whether it’s worth the risks. For some Canadians, it’s easier to pay the full schedule safely. For others, though, NOT paying the mortgage early is a crime against their budget. 

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