Should You Pay Off Your Mortgage Early? - Part Two (The CONS)
Brian Kondo
Wednesday, April 24, 2024
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.
Dealing with Financial Emergencies
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.
My 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.
Thanks for reading today’s BLOG!!!
Brian Kondo
Sales Representative / Team Leader
The Brian Kondo Real Estate Team
Re/Max Hallmark First Group Realty Ltd.
905-683-7800 office
905-426-7484 direct
brian@briankondo.com
www.BrianKondo.com
www.BrianKondoTeam.com
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