How to Pay Off Your Mortgage Faster in Canada

Buying a home is one of life’s most significant financial decisions. After all, a mortgage may be the largest loan you ever make. So how can you pay off your mortgage faster?

The Fastest Way to Pay off a Mortgage

Increase Your Mortgage Payment Amount Above the Minimum

When you increase your mortgage payments above the minimum by even a small amount, you will pay off your mortgage more quickly and save money on interest.

For example, if you can afford to add $200 monthly to your established $2000 a month mortgage repayment, you’ll reduce the overall interest you pay on your loan.

Ensure you don’t exceed the repayment amounts permitted by the terms of your contract. Your mortgage contract will tell you how much you can increase your annual payments before incurring penalties.

Once you increase your payments, in most instances, you can’t reduce them again until the end of the term. The term is the length of time your mortgage contract is in effect and includes your interest rate and other conditions. The duration can range from a few months to 5 years or longer.

Choose an Accelerated Payment Option

An accelerated payment option allows you to make weekly or biweekly payments instead of monthly payments. With this option, you make the equivalent of one extra monthly payment per year and realize significant savings in interest by the end of your amortization period.

Here is an example of how much you could save with an accelerated payment option:

Family A

Family A has a $300,000 mortgage at 6%. They pay $1,942.00 per month. If the interest rate and payments stay the same, they will pay off their mortgage in 25 years. They will have paid $300,000.00 in principal and $275,825.96 in interest.

Family B

Family B has the same $300,000 mortgage and a 6% interest rate. They pay $959.71 in accelerated biweekly payments. It will take them 21 years to pay off their mortgage. They will have paid $300,000.00 in principal and $224,778.22 in interest.

In this example, Family B saves $51,000 in interest payments.

Make Additional Lump Sum Payments

A lump-sum payment is an annual percentage limit that you are permitted to make against your mortgage. The percentage is somewhere between 0 and 25%. Making a lump-sum payment always saves you money on interest.

You can make lump-sum payments:

  1. before the end of your term
  2. at the end of your term
  3. at certain times during your term
  4. on specific dates set out in your contract

The payment can either shorten the time it takes to pay off your mortgage or reduce your monthly payment amount.

Be Aware of Prepayment Penalties

Read your mortgage contract carefully to ensure your prepayment does not exceed the terms of your agreement. Also, pay close attention to the details about penalties for prepayments.

Use The Smith Manoeuvre

Make your mortgage payments tax-deductible by using The Smith Manoeuvre.

Here’s how it works:

A $300,000 mortgage at 4.0% over 25 years will set you back about $173,000 in interest costs. That $300,000 will end up costing you over $473,000.  And that’s after-tax income, which means you’ll have to earn about $675,000 to pay off your home if you’re at the 30% tax bracket.

No wonder it’s difficult to save for the future.

But if you make it tax-deductible using The Smith Manoeuvre, you will recover a good chunk of that interest in the form of yearly tax refunds. Use the tax department’s money to pay down your expensive, non-deductible mortgage faster, and you’ll see it melt away many years sooner than you imagined possible.

So it stands to reason: if you are going to have mortgage debt, why not make it tax-deductible? The Smith Manoeuvre shows you how.

How To Pay Off Your Mortgage Faster When You Renew

It’s time to renew your mortgage and find the best mortgage rate possible for the next term. Rates may have increased or, hopefully, decreased since you last signed a mortgage document. You’ll come out ahead if the rates have gone down across the board. If rates have gone up, some strategies can help you pay your mortgage off faster.

Take Advantage of Lower Interest Rates

Always shop around for the best rates going. Banks and credit unions are traditional lenders whose rates fluctuate according to the Bank of Canada’s prime rate. Even a small lower percentage difference will be to your benefit for the term of your mortgage.

Fixed-rate Vs Variable-rate Mortgage For Paying Your Mortgage Off Faster?

The variable rate is generally the best (lowest) one available, but it fluctuates with any changes to the prime rate. If the prime rate falls, you can pay off your mortgage faster at the new, lower rate. Conversely, your lender will likely increase your repayment if the prime rate increases.

Variable-rate mortgages are advantageous to buyers who:

  1. can pay off their home before there is a new prime rate increase
  2. can afford to accelerate payments before any prime rate increases
  3. are likely to receive a higher-paying job in the near future that can accommodate higher mortgage payments if there is an increase in prime
  4. are between selling and buying a new home and temporarily carrying payments for two houses.
  5. short-term homeowners expect to sell their homes before the prime rates rise.

Fixed-rate loans

With a fixed-rate loan, the borrower is protected from sudden (and potentially significant) increases in monthly mortgage payments if prime rates rise. Fixed-rate mortgages are also straightforward, with no variation in payments throughout the term, making it easier to budget. Variable term loan payments, however, can frequently change throughout the term.

When deciding on a fixed rate or variable rate loan, Investopedia suggests you ask yourself the following questions:

  1. How large a mortgage payment can you afford today?
  2. Could you still afford a variable rate mortgage if interest rates rise?
  3. How long do you intend to live on the property?
  4. In what direction are interest rates heading, and do you anticipate that trend to continue?

 

Shorten Your Amortization Period

The amortization period is the time it takes you to pay off your mortgage. A 25-year amortization period is one of the most common and the maximum available to those whose down payment is less than 20%. However, if your down payment is 20% or more, you can extend your amortization period to 30 years.

A longer amortization period means lower monthly payments, but it also means you will pay more in interest overall.

A shorter amortization saves you money. Ratehub.ca provides the following example:

Keep Your Payments The Same When Changing Your Mortgage, Even If The New Interest Rates Are Lower.

While it is tempting to negotiate a lower monthly payment when renewing your mortgage term, consider keeping your payments the same, especially if your financial situation is solid and you can afford to do so. Maintaining your regular payment rate when the interest rate is lower will help you pay off your mortgage faster and save you money.

Consider An Open Mortgage Agreement Instead Of A Closed Mortgage

Having a closed mortgage means that you have to honour the established loan agreements throughout a term. You can only make changes once your term is up. A closed mortgage is less flexible than an open mortgage. Payments must be made according to the agreed-upon time and amount. However, closed mortgages have lower rates because the lenders can be sure of your payments for the length of the term.

An open mortgage, however, allows you to pay as much above the minimum monthly payment as you want to as long as it meets the minimum monthly payment specified in the loan agreement. So, if you pay down your mortgage faster, you save money.

Factors to Consider Before Paying Off Your Mortgage Faster

When you pay off your mortgage faster, either through lump-sum or accelerated payments, you will have less money available for other things. A mortgage is one of the most significant debts you hold, but it also has the lowest interest rates. Much lower than personal loans, lines of credit or other consumer debt, for example.

Before you decide to pay down your mortgage faster, consider the following:

You’ll Have Less Money Available

How will having less money for day-to-day expenses impact your family’s lifestyle? Groceries, vacations, kids’ activities, and other costs that make life more enjoyable are important. Paying down your mortgage quickly will save you money over the amortization, but is it worth it if it leaves you short now?

Accelerating payments may be the way to go if you are approaching retirement age and want to be mortgage-free before you stop working.

Do You Have An Emergency Fund?

An emergency fund equal to two or more months of family income is important. An emergency fund will help you weather unexpected health issues, sudden unemployment, emergency home repairs or any other unexpected expense.  Putting all your available funds into paying down your mortgage instead of accumulating an emergency fund means you will have to borrow money to manage the unexpected.

Other Financial Goals May Prove More Advantageous

Diversified long-term investments of any extra funds you have could, over time, earn you more money than what you’ll save by paying down your mortgage.  Playing the investment “long game” may be the better plan.

Paying Off Other Debt Might Be A Priority

Credit card interest rates are high – the average rate in Canada is 19.99%. In addition, unsecured personal lines of credit (other than home equity lines of credit) are, on average, above 6%. Considering that mortgage rates are much lower, it makes sense to pay down consumer debt with any available cash before accelerating mortgage payments.

Is It Worth Paying Off a Mortgage Early In Canada?

Paying off your mortgage early in Canada (or wherever you live) always saves you money in the long run. For example, paying an extra $100 a month can shave three years off a 25-year amortization and save you $15,000. But not many Canadians are taking advantage of accelerated payment strategies.

Why is that?

A recent survey (May 21-2022) commissioned by CIBC and carried out by Angus Reid found that only 55 percent of 1,509 online respondents with mortgages had taken some kind of action to repay their mortgages faster since they’d initially bought their homes.

The reason? They can’t afford to pay down their mortgage because their money is going elsewhere. New homeowners, especially those with young families, are busy paying day-to-day expenses, paying down consumer debt, or saving for retirement.

But those who can pay down a mortgage early do just that and reap the benefits of paying less in interest.

What Happens When You Pay Off Your Mortgage In Canada?

When you pay off your mortgage in Canada, you are mortgage-free, and all the equity in your home belongs to you (and not the lender). So if you’ve stayed within the parameters of your mortgage agreement and exercised one or more of the strategies we’ve told you about, you could be mortgage-free faster.

What are the drawbacks?

Paying your mortgage down faster could hurt your investment goals, such as putting money into an RRSP, RESP, or TFSA. You might also leave yourself short of cash to pay other debts.

What Are The Penalties For Paying Off The Mortgage Early?

According to canada.ca, The prepayment penalty will usually be the higher of: an amount equal to 3 months’ interest on what you still owe or the interest rate differential (IRD).

The lender will usually use the IRD calculation if the interest rate on your mortgage is higher than the current interest rate and you signed your current mortgage contract less than five years ago.

Example of a prepayment penalty calculation:

Suppose you want to break your mortgage contract to get a new contract with a lower interest rate. If you want to estimate how much the prepayment penalty will be, the following example will show you how.

Assume the following:

  • outstanding mortgage balance: $200,000
  • current interest rate: 6%
  • number of months left in term: 36 months left in a 5-year term
  • the current posted interest rate for a mortgage with a 36-month term offered by your lender: 4%

 

The approximate fees are:

  • the amount equal to 3 months’ interest on what you still owe: $3,000
  • IRD: $12,000

You have to pay a prepayment penalty of $12,000, the higher of the two amounts. You may also have to pay an administration fee. Source, Canada.ca

Why You Should Not Pay Off Your Mortgage.

When mortgage interest rates are very low, the money you use to pay down your mortgage does not give you a strong return on your investment. (ROI) A better financial goal may be to pay off credit cards, personal loans, and other consumer loans, all of which have high interest.

If paying off your mortgage faster means you don’t have the money to invest for retirement (RRSP), your children’s education fund (RESP), or to save for emergencies, you may end up being “house poor.” Once you’ve put extra money on your mortgage, you can’t get it back until you sell the house.

How Long Does It Take The Average Canadian To Pay Off a Mortgage?

The standard amortization period in Canada is 25 years, and that’s about how long it takes the average Canadian to pay off a mortgage.  Higher home prices and historically low-interest rates encourage buyers to choose a 25-year amortization. However, if cash flow allows, it’s possible to reduce the amortization length by making accelerated payments whenever possible.

Using a Heloc To Pay Off Your Mortgage

Your Home Equity Line of Credit (HELOC) is a revolving line of credit that is secured against the equity you have in your home. A revolving line of credit means you can borrow money, pay it back, and borrow it again up to the maximum credit limit. A HELOC has a variable interest rate that increases or decreases with the Bank of Canada’s prime rate. 

You can use your HELOC for home renovations, holidays, a new car, education expenses – essentially anything you need cash for. There are no fixed repayment amounts; however, you must make monthly interest payments on the amount you’ve borrowed from your HELOC.

Can You Use A Heloc To Pay Off Your Mortgage?

You can use your HELOC to pay off your mortgage but remember, you are exchanging a mortgage loan with fixed interest for a HELOC loan with fluctuating interest. Before you decide about using your HELOC to pay off your mortgage, consider the market forecasts regarding Canada’s prime rate and the possibility that it will continue to increase.

If you are confident that you can weather any unexpected changes in your employment, health, and expenses, paying off your mortgage with a HELOC could be a good strategy.

What Happens To My Heloc When I Pay Off My Mortgage?

If you owe money on your HELOC when you pay off your mortgage, you will eventually have to pay off the HELOC too. On the other hand, if you want to take out a HELOC using the equity on your home as collateral, you will essentially be taking the same steps as applying for a mortgage but without a lower mortgage rate.

What Are The Disadvantages Of A Home Equity Line Of Credit?

Canada.ca lists the following disadvantages of a home equity line of credit:
  • it requires discipline to pay the HELOC off entirely because you’re usually only required to pay monthly interest
  • large amounts of available credit can make it easier to spend higher amounts and carry debt for a long time
  • to switch your mortgage to another lender, you may have to pay off your full home equity line of credit and any credit products you have with it
  • your lender can take possession of your home if you miss payments even after working with your lender on a repayment plan
  • variable interest rates can change, which could increase your monthly interest payments (your lender will provide advance notice of any change)
  • your lender can reduce your credit limit at any time (your lender will provide advance notice of any change)
  • your lender has the right to demand that you pay the total amount at any time
  • your credit score will decrease if you don’t make the minimum payments as required by your lender

Can a Mortgage Be Tax Deductible?

Your mortgage can qualify for tax deductions in some situations, including renting out all or part of your home and using The Smith Manoeuvre to reinvest funds via a readvanceable mortgage.

Can You Claim Mortgage Payments On Taxes?

Mortgages on a single-family residence are not tax-deductible; however, if your entire property is rented out for the whole year, you can deduct 100% of the mortgage interest paid. On the other hand, if your property operates as a short-term rental, you may only claim a portion of the interest paid on the home.

Is Interest Tax-deductible In Canada?

Taxpayers may be eligible for a tax deduction for interest paid on a loan or mortgage. According to Canada Revenue Agency (CRA), “most interest you pay on money you borrow for investment purposes can be deducted but generally only if you use it to earn investment income.

Putting It All Together

The Absolute Fastest, Most Efficient Method of Paying Off Your Mortgage

Use The Smith Manoeuvre

The Smith Manoeuvre is a highly efficient method of simultaneously accomplishing three of a typical Canadian’s goals: eliminate your expensive, non-deductible mortgage debt faster than the banks would have you, generate valuable tax deductions every year, and invest for your future – starting now.

Fraser Smith, a financial planner based on Vancouver Island in BC, Canada, developed The Smith Manoeuvre and shared it in his 2002 book by the same name. His son, Robinson, published his own book on the strategy in 2019. The author refers to this manoeuvre as a debt conversion strategy rather than a leveraging tactic because it can potentially lead to tax refunds, faster mortgage repayment, and a larger retirement portfolio.

The Smith Manoeuvre strategy recommends taking out a readvanceable mortgage when applying for a mortgage. A readvanceable mortgage combines a HELOC and a mortgage. Combining a mortgage and a HELOC into a readvanceable mortgage enables homeowners to repay their mortgages quickly and ultimately become mortgage-free faster.

How To Pay Your Mortgage Off Faster With The Smith Manoeuvre?

Learn the step-by-step process for making your Canadian mortgage tax deductible, using The Smith Manoeuvre strategy explained in Robinson Smith’s National Bestseller!

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