5 reasons not to pay off your mortgage early

1. You say goodbye to 'cheap money'

If you took out your mortgage in recent years, you probably got a great deal on your loan. If it's not costing you much, why rush to pay it off?

Interest rates hit rock bottom in the years following the Great Recession. Some homeowners are paying as little as 2.64% on their mortgages, which is a steal compared to the double-digit interest rates of the past.

Instead of paying down your mortgage, use those same funds to make money.

How much home can you afford?

Whether you're hunting for a new home or looking to refinance your mortgage, knowing how much your new loan might cost you is critical. Use our handy mortgage calculator to help you understand what your payments could look like.

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2. You miss out on potential profits

If you're able to find extra money in your budget, invest it rather than putting it toward your mortgage. You're likely to come out ahead, even when you account for the interest you're paying.

Let's say you choose to invest in one of the popular index funds that mimic the S&P/TSX 60 composite index — like the iShares S&P/TSX 60 Index (TSX:XIU) by BlackRock.

iShares S&P/TSX 60 Index gained 21.72% in 2019. Investing could offer you considerable returns compared to the interest you'd save by paying off your home loan, particularly if your mortgage rate is below 3% or 4%.

Consider investing with an automated investment service like Wealthsimple. Its intelligent automated portfolios only invest in low cost ETFs, including several S&P/TSX 60 index funds like the iShares S&P/TSX 60 Index.

3. You tie up cash you might need

Another reason to pay no more than the minimum due on your mortgage each month, is that it's a way to maintain liquidity. In other words, you can make sure you've got money that's within easy reach in case you need it.

How would you cover a financial emergency, like a big car repair or flooded basement? Surveys show that only 36% of Canadians are socking money away into emergency funds.

You never know when you might suddenly need a large sum of cash. Having an emergency fund is better than tying up too much money in your home, by disposing of your mortgage early.

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4. Possible prepayment penalty

After all your diligence in making your monthly payments on time, you might end up having to pay a penalty for paying off your mortgage early, known as a prepayment penalty.

Your lender may charge a fee if you contribute more payments than allowed toward your mortgage or you break your contract.

These fees can cost you thousands of dollars, so be sure to check with your lender about their rules before you pay decide to pay off your mortgage.

5. You may decide to rent out the place

A final argument for patiently paying your mortgage on schedule, involves what you might want to do with your property in the future.

Is there a chance you may one day want to move out and rent the place to someone else? In that case, you wouldn't want to rush to get out from under your loan.

It's likely a tenant's monthly payment would more than cover your monthly mortgage payment. So, you could move out and continue to enjoy the benefits of owning the home — while letting someone else pick up the cost!

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