Repaying your mortgage lender may seem like an excellent idea through and through. You ensure your mortgage loan is repaid, and in return, you own your home. However, saying goodbye to your mortgage may not be the right move for some homeowners.
There are benefits to paying off your mortgage early. However, these advantages may come with significant consequences on your retirement, how much interest and fees you pay, and your overall financial situation. You must weigh the pros and cons accordingly before deciding whether early payments suit your lifestyle goals.
Here are the pros and cons of paying off a mortgage.
1. Pro – You Can Retire Debt-Free
If you’re in your forever home and you pay off your mortgages Windsor, you no longer have to worry about that debt hanging over your head. You can retire free from mortgage debt and save a ton on interest payments. That’s like free money back in your pocket! You can take what you save and divert it towards higher-earning investments.
2. Con – Prepayment Penalties
If you pay your mortgage early or decide to refinance within a specific period from the closing of the initial mortgage, your lender may charge you a fee. Ask your lender what fees, if any, are tied to you paying off your mortgage early. You may not have any fees if your current mortgage is over five years. That said, check. This number can be a big hit.
3. Pro – You Own Your Home Outright
When you own your home, there’s no risk of not being able to afford future monthly mortgage payments. If you hit a rough patch financially or work slows down, this doesn’t impact your homeownership. You don’t have to worry about your home being foreclosed on. You cannot lose your home when you own it outright.
4. Con – You Deplete Your Savings
If you’ve just saved enough money to pay off your mortgage and spend it on that, you’ve got no emergency savings left over. If you lose your job, unexpected medical needs arise, or you encounter a car repair or something that needs to be immediately addressed, this will put you in a bind.
5. Pro – You Save Thousands On Interest Payments
Mortgages are income generators for lenders. If you pay off your mortgage, you’re no longer paying interest to the bank and can save tens of thousands of dollars. Use a mortgage calculator to help you crunch the numbers to see how much you would save in interest by paying off your mortgage today.
6. Con – You Lose the Mortgage Interest Tax Deduction
In Canada, your mortgage interest is tax-deductible if you use your property to generate rental income. A homeowner can deduct these interest charges on money they borrow to buy or improve a rental property. This major tax advantage could increase your taxable income a fair bit if you decide to fully pay off your mortgage.
7. Pro – You Get More Available Funds for Your Monthly Budget
Mortgage payments free up a ton of money for your monthly budget. You’ll have a lot more cash to play with and can either focus on paying down other debt, investing in other areas or spending on things that bring you joy. Particularly if you have high-interest credit card debt, that’s somewhere the extra cash can go that will do a lot of good.
8. Con – You May Be Able to Earn More by Investing
If you have a large amount of money, you might get more value from it by investing in the stock market. The average mortgage interest rate in Canada for a 5-year term is 3.3%. The average stock market return over a 10-year term is 9%. Although one has to calculate their interest savings and expected home appreciation, one may get more value in the long-term by sticking with what one’s paying on their mortgage and zeroing in on stock market opportunities.
9. Pro – You Have Peace of Mind
When you’re locked in a mortgage, there is always the risk that something could occur and the property is no longer yours. You don’t own your home yet. Paying that off gives you the peace of mind of knowing you fully achieved home ownership. You can relax and live free from thinking something can take your home away. Peace of mind is what drives a lot of people to go and pay off the rest of their mortgage after considering the consequences.
10. Con – You May Have Other Options Available
There may be other ways to use your money in managing debt and investing. In addition, regarding your home, looking into concepts such as mortgage refinancing or obtaining a reverse mortgage can also prove more beneficial for certain people. Through methods like these, one can lower their monthly payments and/or restructure their finances in various ways.