Should You Pay Off Your Mortgage Early? Advice for Canadian Homeowners

As a homeowner, one of the biggest financial decisions you’ll make is whether or not to pay off your mortgage early. With interest rates on the rise and the potential for higher borrowing costs in the future, it’s a question that many Canadians are asking themselves. 

Picture it: You have a $200,000 balance on your mortgage, and it’s coming up for renewal in June. Thanks to an inheritance/a huge bonus/a great stock investment/a smart crypto bet, you have enough cash on hand to pay it off and live mortgage-free. 

But should you pay off your mortgage early? 

In this blog, we’ll explore the pros and cons of paying off your mortgage early and provide insight into the tax and mortgage implications you need to consider.

Reasons to Pay Off Your Mortgage Early

Lower Interest Costs

By paying off your mortgage early, you’ll reduce the amount of interest you’ll pay over the life of your mortgage. This can save you tens of thousands of dollars in interest payments (or more), especially if you have a long amortization period. 

For example: If you have a $500,000 mortgage with a 25-year amortization and a 4% interest rate, you’ll pay $226,467 in interest. If you can pay off your mortgage early, that’s an extra $226,467 you can use to invest elsewhere. 

Increased Cash Flow

Once your mortgage is paid off, you’ll have extra money each month that can be used for other purposes – investing, saving for retirement, paying down debt or upgrading your lifestyle. For example, if you have a $2,500 mortgage payment each month, paying off your mortgage could provide you with an additional $30,000 per year in cash flow.

Peace of Mind

Owning your home outright can provide a sense of security and peace of mind that can be difficult to achieve when you have a large mortgage payment to make each month. There’s no stress about what’s happening with interest rates, and you’ll be less worried about losing your job.  

Reasons You Might NOT Want to Pay Off Your Mortgage Early

Paying off your mortgage is often seen as a financial milestone and a sign of financial stability; however, there are a number of reasons why you may not want to:

Mortgage Penalties

Paying off the balance of your mortgage during the term of your mortgage will mean you have to pay a penalty, which could be thousands of dollars. Remember – you committed to borrowing that money for a certain amount of time, so if you want to break that agreement, you’ll have to pay. If you are considering paying off your mortgage early, try to time it as close to the renewal time as possible in order to avoid penalties. 

What’s the Opportunity Cost of Paying Off Your Mortgage Early?

If you use all of your extra cash to pay off your mortgage, you may miss out on other opportunities, whether that’s investing in stocks or bonds, buying an income property or starting a business. It’s important to consider all of your financial goals and options before making a decision. If you don’t currently have a diversified investment portfolio – where you’re balancing the risks and benefits of real estate, stocks, RRSPs and investments by owning a combination of them all, you may want to hold off on paying off your mortgage. 

Example: If you have an extra $100,000, you may be better off investing that money in a diversified portfolio of stocks and bonds that can provide a higher long-term return than the interest you’re paying on your mortgage. 

Having a mortgage can provide a financial cushion in case of unexpected expenses or financial emergencies. For example, if you lose your job or have an unexpected medical expense, having a mortgage can provide you with the ability to borrow against your home if necessary.

Your Mortgage is a Forced Savings Vehicle

When you pay your mortgage each month, part of that money goes towards paying off the principal amount you owe, and part of that goes towards paying interest. The money that goes towards the principal builds equity and, essentially, forces you to save money each month. If you pay off your mortgage early and don’t direct that amount to other savings or investments, you’ll hurt your long-term wealth. It takes incredible discipline not just to take that $2500 a month you were paying in mortgage and spend it. 

You May Lose Your HELOC (Home Equity Line of Credit)

Most homeowners have a HELOC – a credit line that is secured by the equity in their home. You don’t pay interest on the HELOC until you borrow the money – meaning it just sits idly by as available credit that you can access when you need it. Secured credit lines have much lower interest rates than traditional credit lines and are a great way to fund renovations, second homes or cottages and investment properties. If you pay off your mortgage, make sure to talk to your bank about your options for secured credit.

Lost Opportunity For Higher Returns

If you have extra cash that you could use to pay off your mortgage, you may be better off investing that money in assets that have the potential for higher returns. For example, if you have a 4% mortgage rate but could earn 6% in the stock market, you may be better off investing your extra cash. Alternatively, you might be able to use that money to buy a second property and gain all the benefits of having an income property. 

Investment Properties and Income Tax

When you own an investment property in Canada, you can write off the interest portion of your mortgage against your taxes, which greatly reduces the income tax you have to pay on the rent. Smart investors usually want to have as big a mortgage as possible in order to reduce their overall tax liability. Of course, you’ll need to balance that with how it changes your cash flow and what your interest rate is, but the tax savings can be significant. Definitely talk to your accountant before paying off the mortgage on an income property.  

Our Best Advice

If you’re thinking of paying off your mortgage early, make sure to ask yourself:

1. What would I do with the money each month that I would normally direct to the mortgage? Just spend it or invest it? 
2. What could I, alternatively, do with the chunk of money that I could use to pay down the mortgage? Just spend it or invest it? 
3. How much money will I save in interest, and how can I make that money work for me elsewhere? 

The decision to pay off your mortgage early should be based on a range of factors, including your long-term financial goals, risk tolerance, and retirement savings. While paying off your mortgage early can provide you with a greater sense of financial security and peace of mind, it’s important to consider the opportunity cost of your extra cash and any potential tax implications. Do your research and talk to the experts.