The final mortgage payment: What you need to know

This article has been updated from a previous version. 

If you’re nearing the end of your mortgage payments, you have a lot to be proud of. It’s been a few rocky years, with yo-yoing interest rates. You’re likely relieved to see the end in sight, knowing that not only will you have full ownership of your home, but you will also be free of interest eating up bigger and bigger chunks of your payments.

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.

Watch out for penalties

With your interest rate at a decade high, you may be itching to pay off your mortgage faster to just be done with it all. However, 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.

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

Depending on your interest rate and the remaining balance of your mortgage, 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.

Negotiate your mortgage rate

With more economists predicting interest rate cuts to take place soon, you might consider refinancing to get a better rate or switch lenders if your current one doesn’t offer a good rate when it’s up for renewal.

However, before you do, you want to calculate whether the fees and penalties that come along with a refinancing outweigh the lower interest costs.

Related: $23,579: This is how much more a variable-rate could have cost homeowners over fixed-rate

Options to pay down your mortgage quickly

Of course, just because you can’t put down your remaining balance at once doesn’t mean there aren’t opportunities to fast-pass some of your few remaining payments. 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 ideas they may suggest for paying down the rest of your mortgage while avoiding 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 on your mortgage anniversary. 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.

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.

Lastly, you may want to consider whether or not you will eventually want to tap into your existing equity through a Home Equity Line of Credit (HELOC) with your existing lender, as the discharge prevents you from doing so in the future.

However, once the discharge is complete, your days of making mortgage payments on that property are over.