A mortgage is a long-term financial commitment, often the largest in a lifetime! Usually, the amount is amortized over a period of 25 years. In doing so, borrowers pay a lot of interest, especially in the first few years.
Thus, many people who want to reduce the amount paid will want to repay their mortgage more quickly. Some owners also take advantage of an additional cash inflow to speed up payments.
But, is it always beneficial to pay off your mortgage sooner than expected? Like many real estate questions, the answer depends on your personal situation.
Here are a few things to consider before opting to prepay your mortgage.
When a borrower repays his mortgage faster than the expected term, in whole or in part, it is called prepayment. Usually, financial institutions then impose a waiver on borrowers, which can cost several thousand dollars. It is actually compensation for loss of interest.
Sanctions may apply for several scenarios, in particular when payments are made in excess of those provided for in the agreement and when the contract is terminated or transferred to another financial institution. You also pay a penalty if you pay off your mortgage balance in full before the end of the term, for example when selling your property.
On the other hand, your contract could include a privilege for early repayment, that is to say the possibility of increasing your periodic payment or making a one-time additional payment of a maximum amount found. These options allow you to reduce the duration of your mortgage loan and save part of the interest, as long as you respect the limits fixed in your contract.
The best advice for paying off your mortgage faster is to increase the frequency of payments. Changing from a monthly payment to a weekly or semi-monthly payment is equivalent to making an additional monthly payment each year. Thus, your capital debt will decrease more quickly and you will thus save on interest.
In conclusion, prepaying a mortgage can be advantageous, but it is not necessarily the best choice to make: depending on the terms of your contract, this decision could cost you dearly and have an impact on your entire your finances.
Discuss this with your mortgage broker. He can help you make a well-considered choice, based on your financial situation, your current mortgage contract and your future plans.
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