Is Pre-Paying Your Mortgage the Best Strategy?

By February 25, 2014Mortgage News

Most of us can agree that paying off your mortgage as soon as possible is a great plan. The simplest and easiest way to reduce your mortgage is to accept a bi-weekly payment on the onset wherein your combined payments for the year total 26 which means you have paid one extra month’s mortgage payment in your first year.Let’s look at an example:

Scenario A Scenario B
Mortgage Amount – $250,000 Mortgage Amount – $250,000
Interest rate – 3.29% Interest rate – 3.29%
Amortization – 25 years Amortization – 25 years (reduced to 22.16 years due to bi-weekly payments)
Monthly Payment – $1,220.63 Bi-weekly Payment – $610.32 ($1,220.63/2)
Balance remaining after 5 years – $214,863.60 Balance remaining after 5 years – $208,242.64

In the above example, you will have reduced your mortgage principal by $6,620.96 in your first 5 year term. However, you did pay (out-of-pocket) an additional $6,103.15 by choosing a bi-weekly payment instead of a monthly payment ($1,220.63 x 5). Your saved interest totals $517.81 ($6,620.96 – $6,103.15). Paying off your mortgage sooner by choosing a bi-weekly payment can therefore be considered a good strategy. But is there anything else you should consider with your hard-earned money? Let’s look at a few other options available to you.

One great investment strategy for consideration is the purchase of an RRSP. The main advantage of an RRSP is the tax break one receives (25% or greater) for the applicable tax year it is purchased along with the fact that all investments within an RRSP grow tax deferred until such time it is withdrawn. This amount can therefore be much greater than just paying down your mortgage. Some of our clients purchase an RRSP and use the tax refund to pay down their mortgage. Why not let the government help you pay off your mortgage!

Another option for consideration is investing in a TFSA (Tax Free Saving Account). Started in 2009, this is an excellent opportunity for Canadians to earn tax-free investment income for future years. The maximum contribution for 2014 is $5,500 and, because your  TFSA contribution room accumulates every year, you have an opportunity to invest up to $31,000 as of this date. Another great financial strategy for your consideration!

In conclusion, it is really your decision whether or not you dedicate all your financial resources to pay down your mortgage as quickly as possible or consider some other options (i.e. the purchase of an RRSP or TFSA). Our goal at The Mortgage Centre – BC Direct Mortgages is to simply inform you of those differences in order to allow you to make the right choice for you and your family for a sound financial strategy. If you would like to discuss any of the aforementioned further, please give us a call any time. Or, if you require any immediate assistance with the purchase of an RRSP or TFSA, we can refer you, with your permission, to one of our reputable financial advisors in our professional network.