More Perspectives: The Great Mortgage Renewal — Pay It Down Faster

For many years, historically lower interest rates made it easy to take on debt, particularly in the form of mortgages. While the Bank of Canada reduced interest rates multiple times in 2024, mortgage rates remain at higher levels than the low rates of 2020 and 2021. If you or your family members hold a mortgage, the higher interest costs may prompt you to consider paying it down more quickly.

Here are a few considerations. As always, check your mortgage terms to ensure that penalties don’t apply.

1. Buy within your means — Before committing to a mortgage, consider whether it is comfortably affordable. Plan for contingencies, such as the possibility of a temporary loss of income. Mortgage payments should be manageable alongside other living costs, especially as inflation has increased many expenditures. Potential future expenses, like those associated with having a family (childcare or post-secondary education), might also be factored in.
2. Make regular payments — This may seem obvious, but some skip payments. Making regular payments is especially important at the beginning of the mortgage when the principal amount is high and the mortgage’s interest is a large component. Missing payments can lead to additional fees and interest charges — and negatively impact your credit score.
3. Set up “accelerated” weekly/bi-weekly payments — Accelerated payments allow for extra payments to be made against the principal as part of the regular payment stream — equivalent to an extra monthly payment per year. This will not only reduce interest costs but also shorten the amortization period — the time it takes to pay down the mortgage.

Example: $330,000 Fixed-Rate, Five-Year Mortgage at 5.2%

https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MCCalc-CHCalc-eng.aspx

4. Overpay payments — Consider rounding up payments if you get a raise at work or have extra spending money on hand. It may be surprising how additional dollars added to weekly payments can impact a mortgage over the long run.
5. Don’t forget about the annual lump sum option — Many mortgages allow for paying an additional annual lump sum. Extra funds, such as a work bonus, inheritance or a tax refund from an RRSP contribution can be used to make a one-off payment.

Looking to Renew or Secure a New Mortgage?

Here are a handful of tips that may help secure a better rate.

• Start early. Give yourself time to shop around for competitive rates. Keep in mind that not all brokers have access to every rate, so don’t hesitate to reach out to multiple lenders or brokers.
• Credit score. A strong credit score — usually 700 or higher — may improve your chances of getting a better rate. A higher score signals reliability to lenders, which can work to your advantage.
• Mortgage size. Lenders often favour larger mortgages, which may increase your chances of securing a better rate. Consider this when negotiating.

• Closing date. The sooner your closing date, the better your position to negotiate. Lenders may be more motivated to offer competitive rates with a quicker closing.