The Final Mortgage Payment: What You Need To Know

A middle-aged couple looks at their options for paying off their mortgage

It’s easy to find a lot of information about getting the best mortgage rate or how to refinance a home, but it’s harder to find anything about what happens when you’re about to pay off your mortgage for good.

As you get close to making the last of your payments, there are a few things you consider as your days of having a mortgage are nearly over.

Invest or pay off the mortgage?

During the first few years of having a mortgage, you likely had a higher rate than what you have now. At that time, it made sense to pay down the mortgage. Depending on when you first took out your mortgage, it’s possible most of the payments went towards interest and not principal. Today, the opposite is true.

But if you don’t have a lot saved for retirement, or want to help pay for your child’s post-secondary education, or you want to start a business, it doesn’t make as much sense to pay down the mortgage. Putting the money into an RRSP or RESP is a good place to start.

Options to pay down your mortgage quickly

The end is nearing, and maybe you want to pay off the mortgage faster. You should check the fine print in your mortgage loan agreement or talk to your lender to see what options are available. Here are some of the most common options without prepayment charges:

  • Lump-sum payments: Your lender will usually allow you to make a lump-sum payment of 10% to 20% of the original principal amount every year. The payment goes towards your principal and reduces the amount of interest you pay.
  • Double-up payments: Lenders often let you make a payment that’s double the regular mortgage payment. For instance, if your monthly payment is $1,500 a month, you can pay $3,000 instead. Again, this will go directly towards your principal.
  • Increase payment frequency: If you’re paying monthly, you can usually switch to a weekly, bi-weekly, or semi-monthly option. There’s also the ability to make accelerated payments for all three options, which means your payments are higher and you pay less interest over time.
  • Renewal payments: When the mortgage comes up for renewal, you’re usually allowed to make a payment that’s as large as you want.

Negotiate your mortgage rate

As rates have declined recently, it may be time to refinance to get a better rate or switch if your current lender doesn’t offer a good rate when it’s up for renewal. Before you do, you want to calculate whether or not the fees and penalties that come along with a refinancing outweigh the lower interest costs.

Watch out for penalties

Paying off your mortgage right away instead of waiting for the term to end can be very costly. There are several charges for paying down the mortgage before the term ends, which is what would also happen if you refinance.

Your lender charges a prepayment penalty, which is either equal to three months of interest in the case of a variable rate, or the higher of three months’ interest and the interest rate differential (IRD) in the case of most fixed rates. You can use a mortgage penalty calculator to estimate the cost of breaking your mortgage.

If you want to avoid paying a large penalty, here are some things you can do:

  • Don’t rush to pay it off: If your interest costs are low, it might be cheaper to take your time to pay off the mortgage instead of paying the penalties that come along with paying it off in full.
  • Consider a shorter term when renewing: If you expect to pay off your mortgage in five years, choose a three-year term instead. You can increase your regular payments and won’t have to pay additional penalties when the mortgage is paid off.
  • Convert your mortgage into a secured line of credit: You can use the line of credit to pay off the mortgage when the term ends. You could borrow against the equity in your home to do a renovation, for example. The line of credit can be paid down whenever you want, and there aren’t any penalties. However, the interest rate will often be higher than a mortgage. Also, you might end up borrowing more if you don’t have financial discipline.

The final step

Once the mortgage is paid off, there’s one more thing that needs to be done. You will have to remove the lender’s lien (or its rights) to your property by discharging the mortgage.

You will need to work with your lender and your provincial or territorial land title registry office to get the mortgage discharged. You may also require the services of a lawyer or notary. There are fees involved with this, and the costs will vary depending on where you live. Once the discharge is complete, your days of making mortgage payments on that property are over.

This post has been updated.

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