Do you ever think how wonderful it would be not to have a mortgage?
You’re not alone! Many homeowners think they would be better off if they could just get rid of that mortgage.
You may have read conflicting stories about this; some experts say keep the mortgage, while others say get it paid off as quick as you can. Who do you believe?
Interestingly, there are valid arguments for both points of view which is why you read such conflicting information. We are going to look at the pros and cons of paying off your mortgage early so that you will have the information you need to make the decision for yourself.
Remember the excitement of signing the contract for your first home? Recall the anticipation of moving day and then finally having your first meal, your first sleep in your very own house? The fact that it would be decades before you actually owned it never entered your head!
Then do you remember when you had to make the first repayment – talk about a reality hit! Only then did you realize the enormity of what you had taken on.
Unfortunately, many home-buyers over-extend themselves financially when taking out a mortgage; these days they seem to be encouraged by lenders. So, as the months and years go by, the mortgage repayment they were so confident they could manage, becomes a noose around their necks.
Is it any wonder we want to get rid of that mortgage? Let’s look at the pros of doing this.
Saves Interest
The biggest reason for paying your mortgage out early is the money you will save in interest; this could be a five or six figure sum. If you look back to the paperwork you were so excited about signing, you will see the amortization schedule. This clearly sets out the amount of interest you’ll end up paying over the term of the loan. It frequently doubles the purchase price of the house.
Frees Up Money
One of the main reasons people want to pay out their mortgage is to free up the money that is making the monthly repayments. This is usually a sizeable sum, often up to half the household’s total income! Of course, they recommend allocating only 25% of your income to a mortgage but we all know how people love to stretch this out, so they can have a bigger house in a better neighborhood.
We dream of the things we will be able to do with those thousands of dollars each month, when we no longer have a mortgage!
Find Peace of Mind
Peace of mind is another strong motivator towards getting the mortgage paid off. In uncertain economic times, there is a lot of stress around having a mortgage. Will interest rates go up again? Will we be able to make the next repayment? Are we going to lose our home? If the mortgage is gone, these stressors no longer exist.
Now how about the cons for doing this?
Financial Return
The main reason given for keeping that mortgage is one of financial return. Many experts advise that you can get a higher rate of return on your money if invested wisely, rather than making additional mortgage repayments to get it paid off faster. Theoretically, this could be true but there are several variables that could affect the outcome of such a move. Keeping your mortgage gives a guaranteed 6% return on investment which compounds over the 30 year term; other investment options may be a less safe bet, with no guarantee that you will get a higher rate of return.
Save on Fees
There are often fees and charges associated with paying out a mortgage early. These differ greatly between lenders so it pays to find out what actually applies to your mortgage. This is the reason some experts recommend keeping the final mortgage payment back, until the term is up. If you want to save interest, (and let’s face it, who doesn’t?) make additional repayments during the life of the loan. When you have just a single repayment to go, don’t make it. There’ll be no penalties because, technically, you are way ahead of the repayment schedule so you won’t be defaulting.
Principle Residence or Investment Property?
Each household is different, of course, so you must make your own decisions, based on your unique situation. Seek professional advice from a financial advisor or mortgage specialist so that you have all the facts that are pertinent to your situation.
One of the biggest variants is whether you have a mortgage over your family home, in which you live, or it is on an investment property. If you are in the speculative real estate market, your situation is different again. Most mortgages cover the family home and so the investment is held until they want to move or down-size.
Tax Breaks
Another reason against paying out the mortgage early is the tax breaks that it brings. The interest on your mortgage is tax deductible if you rent your property, giving you an extra return on investment. However, the people who really benefit from this are those who are in high tax brackets; for the average home-owner, this isn’t a viable reason.
So there you have it, the pros and cons of paying off your mortgage early. Make sure you look carefully at your own situation before making the decision to get that ‘monkey on your back’ paid off sooner or not.
So, I am curious. Have you paid off your mortgage early and if so why? Or if you haven’t why not?
Pros and Cons of Paying Off Your Mortgage Early — 39 Comments
It is really tempting to pay early for the peace of mind, but with interests so low, doesn’t really make financial sense… I’m trying not to overpay, and invest instead. People who think they would be able to throw an extra $100 at the mortgage every month yet wouldn’t invest those $100 elsewhere should definitely overpay!
The low interest rates are definitely a factor. I know in Canada right now interest rates are at an all time low making investing more appealing and feasible.
We paid off our mortgage after 1 1/2 years, and saved a little over $25,000 in interest. We primarily did this so that we’d have greater security going into the future (one less institution to lose our dwelling to, one less bill to tackle if our income drops) and more financial flexibility to take on income-generating projects without higher risk. The fact that paying off early was essentially equivalent to a guaranteed 4.3% ROI over the course of the 13 1/2 years that the loan would’ve spanned helped, too.
Good for you guys. Being mortgage free must feel amazing. 4.3% is a decent ROI that is for sure. We are working on an accelarated payment plan for our mortgage. Mortgage free isn’t a reality yet. If you can swing making that happen fast though, it really can open up doors later.
We paid off our first one early – and it felt fantastic! Mind you, rates were much higher than they are now, but they’re is *nothing* like being mortgage free. 🙂
I think the rate you pay it off really effects things. If you only take a year or two to pay off your mortgage you haven’t lost too much investment time. However, if you are taking 10 years lets say, there are a lot of interest gains you can get with investing over that time instead.
We paid off our mortgage early, and, for us, I’d rate the decision as the best financial choice we’ve made in our married lives together. There certainly are good arguments either way, and each person needs to consider their own circumstances and preferences, not blindly accept any ‘rule of thumb.’ For me, I place a very high value on freedom of choice in how I spend my time. Debt, including a mortgage, means I have to devote a certain amount of time at paid employment. Paying off the mortgage gives my wife and I the flexibility to work part time, pursue education or self-employment endeavors, and have more fun (all consistent of course with meeting our long-term retirement goals). Others have different values and goals and so may rightly, for them, choose another course.
You make a great point Kurt. What appeals to a person definitely is a factor. Congrats on being mortgage free though. That is fantastic. I wish I could say the same thing.
I’m of the opinion that you should have the mortgage paid off prior to retirement. This makes your needs in retirement a lot less than if you have that monthly payment to worry about.
Very true. I think that strategy could apply to other things at retirement too. You really want your financial needs to be as little as possible. Retirement is for the wants.
I’m just curious how many people out there actually have the means of paying off their mortgage early? It seems with economy in the drain that would be tough to do? I can see it being a huge advantage in saving money on interest no longer owed.
If you don’t buy more house than you can afford it is actually quite possible to pay of your mortgage fast. However, many people often bite off more than they can chew.
We are in the process of paying off our mortgage early. We bought less than what “we could afford” and then had the fortune of being able to refinance. Really, we should have been doing this years ago. Once we learned how to budget, we found all kinds of money that we had been wasting. Now that goes toward the mortgage!
At our current rate, we should have our 15 yr. paid off in 4 years. I can’t wait for the flexibility that will give us!
That is awesome. You were very wise to buy less house. You will have so much more freedom financially. I know so many house poor people and they aren’t any happier. They are more stressed about the money they owe. A smaller more affordable house would have been the better choice.
Agreed. I guess that’s part of the reason we got into the mortgage crisis to begin with. Oh, I sent you an email, I’m not sure if you got it or if it got lost in spam.
I don’t plan to because my interest rate 4.6% is less than I expect to make from investments and I definitely see at least some time in the next 29 years where savings account interest rates will be above that. On top of that my payment is fixed while the value of my dollars will likely continue to erode over time meaning my future payments will cost less in a sense…
The rate and type of payment plan you have in place is definitely a factor in which strategy would work for you. Low interest rates definitely make a difference to investing instead of paying off the mortgage. If you are paying higher interest though than you can make on investments, you might want to reconsider.
My wife and me are on track to pay off our mortgage in 5 years, which will be VERY early. Our main reason for doing this is because neither of us like owing money to anyone. For us, it’s that simple. We also want to buy an apartment building and get income from renting, and so paying off our mortgage early will open up money that we can spend on a building.
I think you are like many people. Owing money is never a good feeling. We have a similar plan to you. We would also like to expand into real estate down the road.
We did so primarily because I want to be able to live on very little each month. In other words, I wanted the freedom to not *have* to be tied to a job or a “normal” level of income. And it just feels really GOOD to be completely debt free 🙂
No we have not paid our mortgage early but I would like to do so. However, this will depend on how our earning pen out during the next three years or so. Even if we could pay it off, which is very attractive proposition from feeling secure point of view, it doesn’t make sense financially exactly becuae it is very low interest borrowing.
Everyone has a different situation which is why one should never follow the crowd with something like this. You have to do what is good for you. Low interest rates definitely help when you owe money hat is for sure.
I can’t wait to have my mortgage paid off. I’m going to have one BIG party after it happens.
Every blogger I know is invited 🙂
Over the next 10 years, that is really why I need to work, to pay off the mortgage. After that, I should have enough in dividend income and pension to live off.
I’m a strong advocate of not paying down your mortgage early right now unless you have already maxed out your registered savings accounts. Interest rates aren’t going to rise for at least a couple years (beyond that admittedly no one has any clue), but the statistic of 6% is being seriously challenged right now. Personally, I’m also a huge fan of paying down your mortgage AND investing in long-term equities using the Smith Manoeuvre.
We have looked into the Smith Manoeuvre and will probably do it but we want to boost up our other savings first. We still have some registered savings room. Hopefully in the next year or two this can become a reality. Glad you have found a way to max out your potential.
I’m not one to keep debt around for the sake of investing. This includes a primary mortgage. I would’t make this decision likely, and it has to be aligned with your OVERALL financial plan, just as you indicated.
You definitely save money on interest by paying off your mortgage early but I would make sure the rest of your financial house is in order first. You’re giving up a lot of liquidity the second you make an extra payment that will be very hard to get back. Personally, I don’t make any extra payments b/c I want to buy another property to rent out. Real estate is a great investment b/c you only have to put up 20-30% yet you get 100% of the returns.
It is true. Sometimes having that money in savings for other things is the better move. Tying up all your money into your house isn’t the best option either. You really need to be balanced with both.
We bought our first home in 2009 at $265k now worth over $330k and are 3 years into a 5 year term over 25 years and have the cash to pay our mortgage off BUT.. we are not sure what is best for us right now.I just graduated so my income is bound to go up but we have to make a decision at some point. I actually was looking for feedback from others in my Net Worth Update Blog Post early this week to see what they would do with our numbers just for SandG. I realize everyone would do something different but it’s interesting to learn how different we all really are when it comes to $. Lots of good points here. Mr.CBB
It really comes down to individual situations. Everyone’s is different and we need to assess what is best for us. If you ask me I would pay down a good portion of what you owe so that more of your monthly payments go to principle instead of interest and then invest the rest to build you savings portfolio.
Paying mortgage is really forced savings. Nice list of pros and cons of paying off mortgage. I think losing that tax break and tying your money in an not liquid assets are the biggest cons.
To properly execute a Smith Manoeuvre, you need to have a readvanceable mortgage such as Scotiabank’s STEP or BMO’s Readiline. With this form of mortgage, your Home Equity Line Of Credit (HELOC) increases with every dollar paid down on your mortgage principle. With a Smith Manoeuvre, you then use this credit line to invest in income producing stocks, preferably in the form of Canadian dividend-paying companies. For this loan to be tax deductible, you must invest in a non-registered account. RRSPs, RESPs, and TFSAs do not qualify. You also cannot make any non-investing purchases with the HELOC. This is to keep a clean paper trail for the CRA and to show that the entire loan is for investment purposes.
Do you ever think how wonderful it would be not to have a mortgage?
It is really tempting to pay early for the peace of mind, but with interests so low, doesn’t really make financial sense… I’m trying not to overpay, and invest instead. People who think they would be able to throw an extra $100 at the mortgage every month yet wouldn’t invest those $100 elsewhere should definitely overpay!
The low interest rates are definitely a factor. I know in Canada right now interest rates are at an all time low making investing more appealing and feasible.
We paid off our mortgage after 1 1/2 years, and saved a little over $25,000 in interest. We primarily did this so that we’d have greater security going into the future (one less institution to lose our dwelling to, one less bill to tackle if our income drops) and more financial flexibility to take on income-generating projects without higher risk. The fact that paying off early was essentially equivalent to a guaranteed 4.3% ROI over the course of the 13 1/2 years that the loan would’ve spanned helped, too.
Good for you guys. Being mortgage free must feel amazing. 4.3% is a decent ROI that is for sure. We are working on an accelarated payment plan for our mortgage. Mortgage free isn’t a reality yet. If you can swing making that happen fast though, it really can open up doors later.
We paid off our first one early – and it felt fantastic! Mind you, rates were much higher than they are now, but they’re is *nothing* like being mortgage free. 🙂
I am waiting for the day to have that feeling.
I think the rate you pay it off really effects things. If you only take a year or two to pay off your mortgage you haven’t lost too much investment time. However, if you are taking 10 years lets say, there are a lot of interest gains you can get with investing over that time instead.
We paid off our mortgage early, and, for us, I’d rate the decision as the best financial choice we’ve made in our married lives together. There certainly are good arguments either way, and each person needs to consider their own circumstances and preferences, not blindly accept any ‘rule of thumb.’ For me, I place a very high value on freedom of choice in how I spend my time. Debt, including a mortgage, means I have to devote a certain amount of time at paid employment. Paying off the mortgage gives my wife and I the flexibility to work part time, pursue education or self-employment endeavors, and have more fun (all consistent of course with meeting our long-term retirement goals). Others have different values and goals and so may rightly, for them, choose another course.
You make a great point Kurt. What appeals to a person definitely is a factor. Congrats on being mortgage free though. That is fantastic. I wish I could say the same thing.
I’m of the opinion that you should have the mortgage paid off prior to retirement. This makes your needs in retirement a lot less than if you have that monthly payment to worry about.
Very true. I think that strategy could apply to other things at retirement too. You really want your financial needs to be as little as possible. Retirement is for the wants.
I’m just curious how many people out there actually have the means of paying off their mortgage early? It seems with economy in the drain that would be tough to do? I can see it being a huge advantage in saving money on interest no longer owed.
If you don’t buy more house than you can afford it is actually quite possible to pay of your mortgage fast. However, many people often bite off more than they can chew.
We are in the process of paying off our mortgage early. We bought less than what “we could afford” and then had the fortune of being able to refinance. Really, we should have been doing this years ago. Once we learned how to budget, we found all kinds of money that we had been wasting. Now that goes toward the mortgage!
At our current rate, we should have our 15 yr. paid off in 4 years. I can’t wait for the flexibility that will give us!
That is awesome. You were very wise to buy less house. You will have so much more freedom financially. I know so many house poor people and they aren’t any happier. They are more stressed about the money they owe. A smaller more affordable house would have been the better choice.
Agreed. I guess that’s part of the reason we got into the mortgage crisis to begin with. Oh, I sent you an email, I’m not sure if you got it or if it got lost in spam.
Yup, people bit off more than they could chew.
I did get your email but I have been swamped and out of town for work. I will get to it as I can. Thanks for your patience.
I don’t plan to because my interest rate 4.6% is less than I expect to make from investments and I definitely see at least some time in the next 29 years where savings account interest rates will be above that. On top of that my payment is fixed while the value of my dollars will likely continue to erode over time meaning my future payments will cost less in a sense…
The rate and type of payment plan you have in place is definitely a factor in which strategy would work for you. Low interest rates definitely make a difference to investing instead of paying off the mortgage. If you are paying higher interest though than you can make on investments, you might want to reconsider.
My wife and me are on track to pay off our mortgage in 5 years, which will be VERY early. Our main reason for doing this is because neither of us like owing money to anyone. For us, it’s that simple. We also want to buy an apartment building and get income from renting, and so paying off our mortgage early will open up money that we can spend on a building.
I think you are like many people. Owing money is never a good feeling. We have a similar plan to you. We would also like to expand into real estate down the road.
We just paid ours off early last month 🙂
We did so primarily because I want to be able to live on very little each month. In other words, I wanted the freedom to not *have* to be tied to a job or a “normal” level of income. And it just feels really GOOD to be completely debt free 🙂
Congrats Jackie. That’s great. I can’t imagine how good that feels. Enjoy the freedom.
No we have not paid our mortgage early but I would like to do so. However, this will depend on how our earning pen out during the next three years or so. Even if we could pay it off, which is very attractive proposition from feeling secure point of view, it doesn’t make sense financially exactly becuae it is very low interest borrowing.
Everyone has a different situation which is why one should never follow the crowd with something like this. You have to do what is good for you. Low interest rates definitely help when you owe money hat is for sure.
I can’t wait to have my mortgage paid off. I’m going to have one BIG party after it happens.
Every blogger I know is invited 🙂
Over the next 10 years, that is really why I need to work, to pay off the mortgage. After that, I should have enough in dividend income and pension to live off.
Mark
Count my RSVP as in. lol.
We have a similar plan as you. We would like to be mortgage free within the next 10 years if we can. We will see how it goes.
I’m a strong advocate of not paying down your mortgage early right now unless you have already maxed out your registered savings accounts. Interest rates aren’t going to rise for at least a couple years (beyond that admittedly no one has any clue), but the statistic of 6% is being seriously challenged right now. Personally, I’m also a huge fan of paying down your mortgage AND investing in long-term equities using the Smith Manoeuvre.
We have looked into the Smith Manoeuvre and will probably do it but we want to boost up our other savings first. We still have some registered savings room. Hopefully in the next year or two this can become a reality. Glad you have found a way to max out your potential.
I’m not one to keep debt around for the sake of investing. This includes a primary mortgage. I would’t make this decision likely, and it has to be aligned with your OVERALL financial plan, just as you indicated.
By “likely,” I actually meant “lightly.” Boo for not reading my comment well before pressing send!
Everyone will have a different plan and that is something to remember. We can’t be influenced by what others are doing. Our situation is individual.
I am like you. We don’t like debt and we try to stay out of it or get out of it as soon as possible.
You definitely save money on interest by paying off your mortgage early but I would make sure the rest of your financial house is in order first. You’re giving up a lot of liquidity the second you make an extra payment that will be very hard to get back. Personally, I don’t make any extra payments b/c I want to buy another property to rent out. Real estate is a great investment b/c you only have to put up 20-30% yet you get 100% of the returns.
It is true. Sometimes having that money in savings for other things is the better move. Tying up all your money into your house isn’t the best option either. You really need to be balanced with both.
We bought our first home in 2009 at $265k now worth over $330k and are 3 years into a 5 year term over 25 years and have the cash to pay our mortgage off BUT.. we are not sure what is best for us right now.I just graduated so my income is bound to go up but we have to make a decision at some point. I actually was looking for feedback from others in my Net Worth Update Blog Post early this week to see what they would do with our numbers just for SandG. I realize everyone would do something different but it’s interesting to learn how different we all really are when it comes to $. Lots of good points here. Mr.CBB
It really comes down to individual situations. Everyone’s is different and we need to assess what is best for us. If you ask me I would pay down a good portion of what you owe so that more of your monthly payments go to principle instead of interest and then invest the rest to build you savings portfolio.
Paying mortgage is really forced savings. Nice list of pros and cons of paying off mortgage. I think losing that tax break and tying your money in an not liquid assets are the biggest cons.
Tax breaks can definitely help, especially if you are a high income earner.
what in the world is the smith manuever
To properly execute a Smith Manoeuvre, you need to have a readvanceable mortgage such as Scotiabank’s STEP or BMO’s Readiline. With this form of mortgage, your Home Equity Line Of Credit (HELOC) increases with every dollar paid down on your mortgage principle. With a Smith Manoeuvre, you then use this credit line to invest in income producing stocks, preferably in the form of Canadian dividend-paying companies. For this loan to be tax deductible, you must invest in a non-registered account. RRSPs, RESPs, and TFSAs do not qualify. You also cannot make any non-investing purchases with the HELOC. This is to keep a clean paper trail for the CRA and to show that the entire loan is for investment purposes.