Instinctively it would make sense to pay off your mortgage as quickly as you can, to reduce your debt and to build up more equity in your home if you wanted to borrow against it. But this isn’t always the case.
When does paying your mortgage aggressively make sense?
- If you have a mortgage with a high interest rate you should consider paying your mortgage aggressively, since any additional payments (also known as prepayments) go towards reducing the principal. This will lower payments faster and puts you in a better negotiating position when the time comes to refinance.
- If you have access to a Home Equity Line of Credit(HELOC), which can be used as their emergency fund. In that case, the money you’d otherwise put away for unexpected purchases might as well go towards your mortgage.
- If you are uncomfortable with other investment vehicles like stocks and bonds. The big positive to paying a mortgage down aggressively is that it entails zero risk. And it’s better than letting the money sit under the mattress.
- If you have a refinanced mortgage where the money was used to purchase items with a shorter lifespan, like a car. “You don’t want to be paying for the car 15 or 20 years later when you don’t even own it anymore,”
When does paying your mortgage aggressively NOT make sense?
- If you have a super low rate do not rush to pay it back. It is cheap money, so take advantage of it.
- If the property in question is a rental property or houses a home-based business. A portion of the interest, on rental properties and homes with home offices, are tax-deductible these cases, aggressive payback could have very negative tax effects
How could you pay your mortgage more aggressively?
- If you’re a salaried employee and just got a significant pay raise, you could choose to increase your regular payments and direct that extra money towards the principal.
- If your extra money comes to you as a year-end bonus or an owner’s dividend, you could choose to make a yearly lump-sum payment towards the principal.
Your mortgage will most likely be your largest debt. The payment schedule will inform the rest of your financial life, from your monthly budget to RRSP/RESP planning to how much you can save. A consultation with a mortgage broker and your financial planner should happen before putting an aggressive mortgage payback plan in place. When you’re contemplating having less money in your pocket at the end of the month or year, the right perspective is a good thing.