Many homeowners set a goal of paying off their mortgage sooner than their allotted amortization schedule to reduce the amount of interest they pay and become debt free sooner. In fact, we recently blogged about several thirty-something Canadians who’ve done so in less than 15 years and explored the pros and cons this practice. Still, these homeowners are more than the exception than the rule.
CIBC recently released poll data showing that fewer Canadians are paying off their mortgages early. The poll surveyed 1,509 randomly selected Canadians. Of those who currently have a mortgage, 55 percent are working to repay the loan faster, compared to 68 percent in a similar poll conducted last year. Among those that are working towards an early pay-off, the most popular approach is increasing the payment amount, followed by accelerating the frequency of payments (for instance, making bi-weekly instead of twice monthly payments) and making lump sum payments. Using a combination of these strategies could potentially shave off nearly ten years from the life of a mortgage and save tens of thousands of dollars.
Recent low interest rates have perhaps prompted Canadians to reduce their focus on paying off mortgage debt and spend extra money in other ways. CIBC research also shows Canadians are spending more than this year on summer vacations and home renovations.
On average, poll respondents anticipate being mortgage debt-free at age 58. In British Columbia, however, age was the highest in the country: 66 years old. Less than half of mortgage borrowers in the province said they were working on paying off their mortgage early compared to 55 percent nationally. B.C. and Vancouver in particular has some of the highest real estate prices in the country, so this might explain why it’s tougher for British Columbians to get aggressive at paying down their mortgage. A separate survey conducted by Investors Group found that even wealthy Canadians who have the cash to pay for a home often choose to take out a mortgage. Just over two-thirds of Canadians with half a million or more in investable assets keep a mortgage even if they have the cash to pay it off.
You can typically make a lump sum payment at your loan’s maturity date or pay an extra 10 to 20 percent each year without incurring prepayment penalties, but beyond that, prepaying your mortgage may incur penalties. Talk to your mortgage broker if you’re unsure how prepayment penalties might apply to your situation.