Nov 12, 2021
Can Mortgage Be Paid Off Early?
There comes a situation in each one of our lives where we need a little extra money. It could be either a home loan, car loan or any other emergency. Unfortunately, it can take you many years to repay the loan while you keep paying the interest.
If your financial situation turns around and you have access to the lump sum amount of money, you may make an early repayment of your loan.
It's a common belief that paying off your mortgage ahead of schedule can help you save a sizable amount of money. Another common myth is that you don't have to pay interest on your loans.
For some people, early loan repayment is also about peace of mind and freeing some cash for other purposes. But if you're planning to take the same approach and relieve yourselves of the monetary burden. Consider the tax implications to avoid any mistakes.
Can you pay off your mortgage early?
The ratelock.ca should be your first point of contact. Paying off your debt early might be subject to certain specific terms and conditions.
For example, there are chances that you might be subject to a prepayment penalty if you are repaying your loan sooner than your payment schedule. It is also possible that you are bound to make payments only within specific parameters.
What is the prepayment penalty?
A prepayment penalty is a monetary burden that the borrower must bear while paying the loan off earlier than specified in the agreement.
The amount of penalty can vary from one lender to another, and the practice isn't universal. Therefore, we suggest you read your mortgage contract properly and understand the details about penalties.
Wondering how you can repay your mortgage early? Here are three main ways.
1. Increase the frequency of your payments
The time taken to repay your loan is directly proportional to the frequency of payments. So, for example, you can make payments every 1 or 2 weeks, thereby adding one or two additional monthly payments every year. This way, you'll pay your mortgage off more quickly and save on total interest payments.
2. Make early payments
If you have a stack of cash at any time, you can use it to make an early payment on your mortgage. To avoid being penalized, you can prepay up to 15%-20% of the principal amount borrowed during one calendar year. It also means you will repay the principal amount quickly and save a sizable chunk of money on interest.
3. Make additional payments
Another way of paying off your loan faster is to make additional payments to your regular monthly principal and interest payment.
These additional payments will help you pay back the principal faster and save on interest.
Factors To Consider Before Paying Off Your Mortgage Faster
1. First of all, determine how much you will save by paying off your debt early.
Calculate the total interest for the remaining amortization period to understand the total duration of the interest payments.
You will save by reducing your total interest from your final amount.
2. Ensure that you have an emergency fund equivalent to 3 to 6 months of expenses to support yourself. Do not use this money to repay your loan sooner.
3. Early mortgage payment should not in any way affect your financial goals like children's education, monthly bills, etc.
4. It is prudent that you pay off the loans with higher interest rates first. If you have a personal loan or credit card bill that charges more interest, you should pay it off first.
Pros and Cons of Early Mortgage Repayment
Paying off your loan sooner will have the following benefits.
- Your monthly savings increase.
- You can improve your credit score if you are in debt.
- You have free money to use or reinvest in some other avenues.
- There's an opportunity to get a new loan, possibly at a better interest rate.
- You do not need to pay ongoing fees.
If you look at the other side, there are certain drawbacks also, such as:
- Interest on investment and business loans generally offers tax deductions. You stand to lose this deduction by making an early mortgage payment.
If prepayment charges are high, you will lose money here too. Contact us to know more.
Eventually, it boils down to weighing the pros against cons and deciding what is best for you and your family's finances. If you think of repaying your loan early, we suggest you take all these factors into account.
Your mortgage advisor can help you make an informed decision based on your financial situation.