You’ve heard it all before. You should be pre-paying your mortgage. It’s the best way to become mortgage-free faster. And while experts, analysts and bankers have been giving us this prepayment lecture, it turns out – we’ve actually been listening!
According to CAAMP, over the past two decades homeowners have cut the length of their mortgage by two-thirds of the original amortization period. You can see in the chart below just how drastic these changes have been.
The amounts that Canadians are paying towards a lump sum payment to help them achieve being mortgage-free faster are also somewhat staggering. The average monthly increase in the past year was $300; while the average lump sum payment made in the last year was $22,500. Even more, the average lump sum payment for those who became mortgage-free in the last year was $29,000. That’s a lot of money, and at a time when our debt levels are soaring.
Can we really afford to be paying off our mortgages so soon?
Many can’t, says Rona Birenbaum, financial planner with Caring for Clients in Toronto. The problem, she says, is that while people may believe that they need to pay off their mortgage at all costs, they do whatever they can to pay it off. And that includes using high-interest credit cards and personal loans in order to do it.
Ms. Birenbaum says that she often has to say to her clients, “How are you affording this? You must be creating debt somewhere else.” Nine out of ten times, says Ms. Birenbaum, “they are.”
And this doesn’t just keep you in the hole – it can keep you in the hole for much longer than if you hadn’t repaid your mortgage at all. That’s because the interest charges on mortgages is extremely low – especially right now in an environment in which those rates are expected to stay low for some time. But if you’re paying off that mortgage by taking on other high-interest debt, you’re not really getting any further ahead at all. In fact, you’re just digging yourself deeper.
What’s the lesson? To pay off your mortgage as soon as you can, but only if you can do it by not borrowing any more money to do it. When you have extra money, even just a little bit, put it towards your mortgage. This is the only way to do it and to actually pay off your debt, without sinking deeper into it.