There’s a ton of information out there about getting a mortgage, or refinancing halfway through – but the tail end of an amortization often gets short shrift. When the end is in sight, and your mortgage is nearly paid off, it’s easy to get giddy – but there are still opportunities to get savvy about your payment options, and some tough decisions to make.
Here are a few financial conundrums you may face in the final years of your mortgage.
Invest Or Pay Off?
When your mortgage is close to the end, it’s important to take a bigger picture look at your money. Is paying your mortgage off faster the best place to put your money? If your retirement savings are tiny, you have kids in university, or are looking to launch a business, the answer may be no.
Since you are paying off more principal in the later years of your mortgage, and not so much interest, paying things off on a predetermined schedule might not be a bad idea if you have other financial commitments. Socking the money you might have put into extra payments in an RRSP might not be a terrible idea!
Negotiate Your Mortgage Rate
If you have a lot of equity and a tiny mortgage, you have some options for what kind of mortgage you want to go for. If your life is going to be unstable over the next few years, you might want to sign on for a fixed rate mortgage so you know what your payments will be. Even if that rate is higher than you’re paying now, you can’t lose: in those last few years you’re paying off mostly principal, and much less interest anyway.
Read Your Mortgage Fine Print
If you’re close to the end and want to get rid of that mortgage extra quickly, talk to your lender about your choices. There are often a myriad of ways to pay off a mortgage faster. These include:
Double-up payments: Each month (or bi-weekly), paying double your regular payment is often a option.
Make anniversary payments: Every year on your mortgage’s anniversary, you can often make a lump sum payment.
Renewal time payments: When you renew your mortgage, you can often make a payment as large as you like.
Paying your mortgage in one shot, or earlier than the term you signed on for, can come at a price. If you pay down the mortgage before your amortization period is up, be aware you could get dinged with charges.
Financial institutions use a complex math equation called the interest rate differential (IRD) to calculate a penalty if you pay off early. While each institution calculates it differently, try this calculator to help you estimate your costs. Here are some ways to avoid a hefty IRD if you’re trying to pay off your mortgage right away:
When you renew, look ahead: If your mortgage should be paid off in five years, sign on for a three-year mortgage term instead and raise your monthly payments so you don’t have to make extra payments and won’t pay a fine at the end.
Convert your mortgage into a line of credit, secured to your home: You can use the LOC to pay off the traditional mortgage, then just make payments on the principal as you like (set up automatic payments from your bank account to be sure you do pay it down). This is a great option if you also want to travel or do a reno and might need cash. You can pay down the LOC whenever you like with no fines.
Stick to your term: If you owe a fair amount each month and are paying little interest, there may be no need to rush through the final mortgage payments – determine whether any associated penalties would outweigh the benefits of late-term refinancing and plot accordingly.
Don’t forget the last steps: Once yourmortgage after it’s paid off, you must discharge it from the Land Titles Office – an important legal move because otherwise your mortgage will still be registered and you could be open to fraud and other concerns. Your lender should take care of the process – for a fee. Make you see the paperwork and confirm the mortgage is discharged properly. Then you can finally, utterly, breathe easy – and enjoy all that hard-won equity!