*Les renseignements présentés sur cette page sont fournis à titre informatif seulement et ils ne garantissent pas qu’ils s’appliquent à votre contrat de prêt hypothécaire. Ils sont fondés sur les pratiques et les contrats généralement en vigueur chez Desjardins. Avant d’effectuer un paiement additionnel, il est essentiel de consulter les clauses de votre propre contrat de prêt ou de communiquer avec un conseiller ou une conseillère Desjardins. Ce contenu ne constitue pas un avis juridique.
Should you pay off your mortgage quickly or add to your savings?
Buying a home is probably one of the biggest purchases of our lives. And since the total amount of interest paid over the life of a mortgage can be considerable, it may be tempting to pay off your mortgage faster to pay less interest.
Why pay off your mortgage faster?
In some cases, you may want to use any extra cash you have to prioritize paying off your mortgage. This strategy offers several advantages:
- You could save money in the long run. Every dollar that you pay towards the principal will reduce your mortgage balance—and this means you pay less interest.
- You could become “mortgage-free” sooner. For many people, mortgage payments are the biggest expense in their budget. Paying off your mortgage a few years early could give you more financial freedom.
- You could increase the equity in your property. Equity is the portion of your property that belongs to you, either because it has increased in value or because you’ve paid off that portion—or both! If you need financing for other things down the road, you can use your equity as leverage to get better loan conditions.
In some cases, however, depending on your situation, goals and plans, it may be better to put any extra money into registered savings plans, such as an RRSP, TFSA or RESP—even if this means you can’t pay off your mortgage faster, or you could use a strategy that combines both options. Contributing to registered savings plans can provide tax benefits, such as the deductions available when investing in an RRSP. And you could either reinvest the tax savings or use them to pay down your mortgage. If you have high-interest debt, such as a credit card balance, it may be a good idea to prioritize paying it off.
That said, whether you should focus on saving or paying off your debts depends on a number of factors, including the interest rate on your mortgage and your financial goals. If the interest rate on your mortgage is relatively low, it’s usually better to prioritize paying off your other debts. In other words, if you have high-interest debt, such as a credit card balance, it’s usually best to pay it off first.
You should also keep in mind your risk tolerance and investment horizon. For example, if you’re planning to move, sell your home, retire early or travel, ensuring that you have some cash reserves can provide invaluable wiggle room. A balanced approach that takes into account your life goals can help you make well-informed, lasting decisions.
How can you pay off your mortgage faster?
Here are some strategies to pay off your mortgage faster—either by increasing your regular payments or making a lump-sum payment, depending on the terms and conditions of your mortgage agreement.
Generally speaking, any extra payments you make are applied directly to your mortgage balance, which reduces the interest you pay and shortens the initially set out amortization period, which is the period for repaying your mortgage
- Increase the frequency of your mortgage payments: You can choose to make accelerated payments weekly or every two weeks. The concept of accelerated payments is to take the payment calculated on a monthly basis and divide it into four, for example. Since some months have five weeks, they will give you an advantage. Otherwise, your payments can be calculated on the basis of 52 weeks or 26 two-week periods. Contact a mortgage advisor to determine the most suitable option for you.
- Increase your payment amount: Once every calendar year, you can increase the amount of your regular payments with no fees or penalties, up to twice the amount set out in your original mortgage agreement. Contact a mortgage advisor to see if this strategy works for you or to increase your payment amount.
- Make prepayments:* You can pay off, without prepayment charges, up to 15% of the original amount of your mortgage every year. This amount must go towards partially paying off your mortgage and can’t be carried over to the following year. Contact an advisor to see if this strategy works for you or if you want to make a prepayment.
Make sure you build some flexibility into your budget so you have an emergency fund available or to carry out any future plans. The most important thing is that you feel confident and comfortable with your chosen financial strategy.
*Les renseignements présentés sur cette page sont fournis à titre informatif seulement et ils ne garantissent pas qu’ils s’appliquent à votre contrat de prêt hypothécaire. Ils sont fondés sur les pratiques et les contrats généralement en vigueur chez Desjardins. Avant d’effectuer un paiement additionnel, il est essentiel de consulter les clauses de votre propre contrat de prêt ou de communiquer avec un conseiller ou une conseillère Desjardins. Ce contenu ne constitue pas un avis juridique.
* The information on this page is provided for information purposes only and does not constitute a guarantee that it applies to your mortgage agreement. It is based on the practices and mortgage agreements generally in force at Desjardins. Before you decide to make an additional payment, you must review the clauses in your mortgage agreement or contact a Desjardins advisor. This content does not constitute legal advice.