When To Pay Off Your Low-Interest Mortgage

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Note: Winners of last week’s book contest will be announced at the end of this post

A few weeks ago, we posted a reader case Can’t Work Because of Health Issues and Worried, in which our reader had recently become disabled, unable to work, and was worried that their financial situation was going to go into the crapper. As it turns out, no, she was going to be fine, and one of the main reasons is because she made the conscious choice to pay down her debt, first her credit card, and then her mortgage.

She wrote me back after her reader case was up to thank me for featuring her, which was very nice. We always love hearing back from people we’ve helped, but something she said stuck out at me…

You’re given us so much to consider and also.. are the first financial  person who hasn’t gasped when hearing that we decided to pay off our mortgage in such low interest rate times. 

At first, I just thought she talked to some pretty bad advisors, until I started mentioning this around my friends and family and realized they were getting this advice too. It seemed to be such common knowledge that when I started arguing that “No, it totally makes sense to pay off your mortgage even if the interest rate is low,” they would look at me like I had two heads.

So where did this advice come from, and why is it so wrong?

The reason is twofold:

  1. Millennials have never seen interest rates rise so rapidly in our lifetime, so much of the advice written for us didn’t take this into account
  2. Most financial advice is written for an American audience

There’s a lot of the American financial system that’s confusing beyond belief. Why is their retirement plan called a 401(k) and doesn’t have the word “retirement” in it? Who knows?

But when they call a mortgage fixed-rate, they actually mean it. The interest rate is fixed for the entire duration. It doesn’t change, even if the central bank changes interest rates for everyone else. Fixed rate means fixed rate.

Canadians, on the other hand, call our mortgages fixed-rate, but they’re not. They’re fixed for a portion of the time, usually 5 years, and then they reset to a new interest rate. Americans would never call that a fixed-rate mortgage, they would call that a 5/5 ARM, or Adjustable Rate Mortgage.

And unfortunately, Canadians tend to read advice referencing “fixed-rate mortgages,” and think that it applies to our “fixed-rate mortgages” while in reality they were talking about the American definition.

Let’s demonstrate this by…you guessed it…MATHING SHIT UP!

Actual Fixed Rate

Let’s take a mortgage that you got for an abnormally low interest rate during the pandemic, like 2%. And let’s make that mortgage a cool $1,000,000 to make the math easier.

This mortgage has an amortization period of 25 years, and is fixed-rate. ACTUALLY fixed rate, meaning that the interest rate stays at 2% for the entire 25 years. I plugged this into a mortgage calculator and the monthly payment would be $4,235 per month. According to the summary at the end, after 25 years, you’ll end up paying $1,270,354, so $1,000,000 in principal and $270,354 in interest.

Let’s see what happens if we put in a lump-sum payment after 5 years. Over the first 5 years, this is what the mortgage amortization table looks like this…

YearTotal paidPrincipal paidInterest paidBalance
1$50,814$31,181$19,634$968,819
2$50,814$31,807$19,007$937,012
3$50,814$32,447$18,367$904,565
4$50,814$33,099$17,715$871,467
5$50,814$33,764$17,050$837,703
Total$254,071$162,297$91,773$837,703

At the end of 5 years, you’ve paid $254,071 and have a remaining balance of $837,703. Now, let’s say you dump $100k into the mortgage, reducing your outstanding balance to $737,703. This causes your monthly payment to drop to $3,729. This is what the amortization table looks like for the next 20 years…

YearTotal PaidPrincipal PaidInterestBalance
6$44,748$30,331$14,417$707,372
7$44,748$30,941$13,807$676,431
8$44,748$31,563$13,185$644,868
9$44,748$32,197$12,551$612,671
10$44,748$32,844$11,904$579,827
11$44,748$33,505$11,244$546,322
12$44,748$34,178$10,570$512,144
13$44,748$34,865$9,883$477,279
14$44,748$35,566$9,183$441,713
15$44,748$36,281$8,468$405,433
16$44,748$37,010$7,738$368,423
17$44,748$37,754$6,995$330,669
18$44,748$38,513$6,236$292,157
19$44,748$39,287$5,462$252,870
20$44,748$40,076$4,672$212,794
21$44,748$40,882$3,866$171,912
22$44,748$41,704$3,045$130,208
23$44,748$42,542$2,206$87,666
24$44,748$43,397$1,351$44,269
25$44,748$44,269$479$0
Total$894,966$737,703$157,263$0

At the end of this section, you’ll have paid $894,966.

So in total, this mortgage will have cost you $254,071 (Years 1-5) + $100,000 (your extra payment) + $894,966 (Years 6-25) = $1,249,037.

So that means, this mortgage costs $1,270,354 without any extra payments vs $1,249,037, for a difference of $21,317.

In other words, you ploughed $100,000 early into your mortgage to save $21,317. Not bad, but not exactly earth shattering returns here.

Now let’s see what happens if the interest rate resets upwards, similar to what’s about to happen to all these Canadian mortgages out there.

“Canadian” Fixed-Rate

Let’s start with our base case. Same starting parameters, a $1,000,000 loan with a 25 year amortization, with a starting interest rate of 2%. The first 5 years looks identical to the last example, and at the end you’ll have paid $254,071 with an ending balance of $837,703.

If you do nothing and let the mortgage renew at prevailing interest rates, which are currently hovering around 6%, and it stays like this for the rest of the mortgage, your monthly payment jumps from $4,235 to $5,966, and this is what years 6-25 look like…

YearTotal paidPrincipal paidInterest paidBalance
6$71,592$22,553$49,039$815,150
7$71,592$23,927$47,666$791,223
8$71,592$25,384$46,209$765,839
9$71,592$26,930$44,663$738,910
10$71,592$28,570$43,023$710,340
11$71,592$30,310$41,283$680,030
12$71,592$32,155$39,437$647,875
13$71,592$34,114$37,479$613,761
14$71,592$36,191$35,401$577,570
15$71,592$38,395$33,197$539,175
16$71,592$40,734$30,859$498,441
17$71,592$43,214$28,378$455,227
18$71,592$45,846$25,746$409,381
19$71,592$48,638$22,954$360,743
20$71,592$51,600$19,992$309,143
21$71,592$54,742$16,850$254,401
22$71,592$58,076$13,516$196,325
23$71,592$61,613$9,979$134,711
24$71,592$65,365$6,227$69,346
25$71,592$69,346$2,246$0
Total$1,431,846$837,703$594,143$0

At the end, you will have paid $1,431,846. So over the life of the mortgage, the total cost is $254,071 (Years 1-5) + $1,431,846 (Years 6-25) = $1,685,917.

Ok great. Now let’s see what happens if we plough $100,000 into the mortgage at renewal time. Again, this brings down the mortgage balance at year 5 to $737,703.

This has two effects. One, the monthly payment is still going to increase due to the higher interest rate, but not as much. Where before, it jumped from $4,235 to $5,966, now it only goes up to $5,254.

And here’s how years 6-25 look.

YearTotal paidPrincipal paidInterest paidBalance
2023$63,046$19,861$43,185$717,842
2024$63,046$21,070$41,976$696,772
2025$63,046$22,354$40,692$674,418
2026$63,046$23,715$39,331$650,703
2027$63,046$25,159$37,887$625,544
2028$63,046$26,691$36,355$598,852
2029$63,046$28,317$34,729$570,536
2030$63,046$30,041$33,005$540,494
2031$63,046$31,871$31,175$508,623
2032$63,046$33,812$29,234$474,811
2033$63,046$35,871$27,175$438,940
2034$63,046$38,056$24,990$400,885
2035$63,046$40,373$22,673$360,512
2036$63,046$42,832$20,214$317,680
2037$63,046$45,440$17,606$272,240
2038$63,046$48,208$14,838$224,032
2039$63,046$51,143$11,903$172,889
2040$63,046$54,258$8,788$118,630
2041$63,046$57,562$5,484$61,068
2042$63,046$61,068$1,978$0
Total$1,260,921$737,703$523,218$0

At the end of this section of the mortgage, you’ll have paid $1,260,921. So that means over the life of this mortgage, you’ll have paid $254,071 (Years 1-5) + $100,000 (lump-sum payment) + $1,260,921 (Years 6-25) = $1,614,992.

Compared to the original scenario in which you’ve paid $1,685,917, by dumping $100k into the mortgage before it renews at a higher rate, you’ll save $70,979 in interest charges.

So that means that by spending $100k into paying your mortgage before your interest rate jumps, you’ll save over $70k, for an effective return on your investment of 70%!

Why Does This Happen?

This effect is caused by the fact that all the mortgages in this country are about to reset at vastly higher rates, so this creates an interest rate differential at renewal time. It’s this change in interest rates that the rule “Don’t pay off a low interest mortgage” doesn’t take into account, and the bigger the differential between your starting rate and your renewal rate, the bigger this advantage will be.

Because it’s easier to find cash to throw at your mortgage when your interest rate is still low, that’s when you want to be paying it off. You’ll be able to make way more progress quicker before renewal, because after renewal your mortgage monster is going to get a LOT hungrier. Then you’ll get hit with a double-whammy. Your mortgage payment will shoot up, making it harder to save money, which makes it harder to build up cash to pay down the principal.

But if you do it now while your payments are still relatively low, you’ll be able to reduce your balance a lot quicker, so when the mortgage monster’s appetite heats up, it’ll be a smaller monster to tackle.

So what our reader did was the exact right move because she was able to throw so much cash at her mortgage while her interest rate is still low. And unfortunately, the advisors she’s talked to are taking a rule that made sense for mortgages whose interest rates don’t change and mistakenly applying it to mortgages that do.

Conclusion

I ran this simulation using assumptions that I thought were the most relevant, meaning a large mortgage obtained at low interest rates, about to reset much higher. Everyone’s mortgage is different, so I encourage you to play around with the mortgage calculator I used, which is right here. You may find that paying off your mortgage might not make sense after all, or you might find it totally makes sense.

But either way, don’t rely on a rule that was written for a different audience living in a different interest-rate environment and assume it applies to today’s world of rapidly increasing interest rates, because it doesn’t.


We really enjoyed reading through all 100+ entries for JL Collins’ Pathfinders book! I could really see that people understood the point of the question “If you lost all your possessions in a house fire, what is the one thing you’d miss the most?” It was to realize what’s important to you and why we work towards FI.

Most people said photographs of their loved ones. A close second was “nothing”–all material possessions can be replaced, and the third is sentimental items. There were quite a few suck-up answers too about their copies of “The Simple Path to Wealth” and “Quit Like a Millionaire”. HAHA. Well played.

And now, without further ado*drum roll* the winners of JL Collin’s Pathfinders book are:

  1. Sarah: “The possession I would miss most is my 6′ tall fig tree that I propagated from a leaf taken from my grandparents’ yard 13 years ago, when they were still alive.”
  2. Danika.O: “I would miss my journals, which I’ve kept for decades since I was a teen. And of course, my dog eared copies of Quit Like a Millionaire and the Simple Path to Wealth 😁”
  3. Kate: “Most of my things are digitized but I have my grandmother’s hairbrush that I last used when she was semi-conscious on the last day of her life. I quietly brushed her hair and talked with her. I also have my five kid’s first baby curls. Those would be hard to lose.”

Thanks to all of you for entering! If you didn’t win, you can buy a copy of JL Collins’ Pathfinders here.


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20 thoughts on “When To Pay Off Your Low-Interest Mortgage”

  1. Not that I disagree with the overall sentiment, but in order for it to be a fair comparison wouldn’t you have to take into account the opportunity cost of what else you could have been doing with that $100,000 if you didn’t plow it into mortgage repayment?

    If you invested that $100,000 at a rate of return of 4%/year for 20 years you’d expect to make back more than $70k wouldn’t’ you?

    1. While I understand your perspective, evaluating the fairness of the comparison involves considering the opportunity cost of allocating $100,000 elsewhere. Regarding CapCut, the mod APK enhances the app’s capabilities, providing a unique editing experience. Explore its features for an even more dynamic video editing process.

  2. I have a 15-year, low-interest-rate mortgage.

    I was about to pay it all off, then I realized that by putting that money in a savings account with interest rate of 5%+, I can earn enough in interest to pay off the interest portion of the mortgage itself.

    So effectively I am getting the loan for free at the moment — as long as the interest rate stay high for my savings account.

  3. For US style fixed mortgages, I don’t believe that a large principle payment would automatically trigger a lower mortgage payment afterwards. My understanding is that to achieve a lower payment, you must first make the large principle payment on the current mortgage, followed by a refi into a new mortgage/loan. At today’s interest rates this might actually result in a significantly higher mortgage payment…. I could be wrong…I’m definitely not a homeowner/mortgage type of person.

    1. They may be referring to a recast of the loan, Bill, which is different than a refinance and can be a good option when paying down a significant amount of principal. The lender essentially adjusts the amortization/payment schedule, but the rate stays the same.

      1. Gotcha… Thx for the info !
        ..I’ve never heard of recasting. I’m curious how common it is… also curious if the original mortgage must first be eligible for recasting, much the same way as how a mortgage must be eligible in order for it to be assumable….most are not.

        1. I had never heard of recasting either. Not sure I’d want to recast, because a large injection of principle to a normal US mortage can really lower the total amount of interest paid, and the home would be paid off faster.
          Generally, though, I like to keep money on hand vs. locking it up in a house. What if you wanted to switch houses and need a downpayment in the middle of a recession? Easy to do if you’ve got cash on hand; getting equity out of the current house or a loan would be more expensive and troublesome.

    2. You don’t have to refinance your mortgage. After putting a lump sum towards the principle, you should “RECAST” your mortgage. It costs anywhere from $0 to $300 to recast and takes about 2 weeks until it is in effect. It will reset your monthly bill lower for the life of the mortgage!

  4. This is a very good article. You can definitely make the argument that putting money into other investments would be smarter as opposed to paying it down on a low interest mortgage. However, as we are learning now, we have no control over what happens to our interest rates and they can go extremely high, even higher than they are now.

    There are two huge benefits to paying off your mortgage. One is that it frees up your monthly payment to go anywhere else that you need it to. By paying it off early you gain access to the extra money earlier.

    The other news benefit is that now you can leverage the equity in your home to invest in other things. For instance, if you have a million dollar home with no mortgage, you can leverage up to 80% of that value to the line of money privately, invest in companies, stocks etc. Or you could even buy an income property, and when you do that you can write off the interest. Its hard to do these things while carrying a big balance in your mortgage.

  5. Australia has only 1-3 yr fixed terms creating a lot of uncertainty for borrowers. We do have choice of putting cash in an offset account which reduces interest but isn’t actually paid off the loan so you can use if needed. Education about mortgage products is poor and people don’t understand basic math that going from 2-4% will make a huge difference in repayments.

  6. Sometimes I think people dwell on this too much, but having no mortgage is a greater pulse of financial stability than many think. Sure you can currently make more than paying it down, but having a roof over your head means a lot and can make people more risk-forward with their investments.

  7. Thankful for our US truly fixed low rate loan. We used to pay extra principle before we refi’d in early COVID times. Recently we plunked some savings generated (partially) from not doing that into short term CD’s with a higher rate than the loan. Easy win!

  8. While I think this is great, you can math it up more. If you can afford it, (and based on this example) you can reduce your amortization by 5 years and save $145,000 on interest charges; reduce it by 10 years and save over $281,000 in interest charges. There is also a Principal Prepayment that you can add to your mortgage to reduce your total interest and pay your mortgage sooner. Another option is to increase your amortization which will reduce the interest & principal, then top up the Principal Prepayment to what you would have paid thus you reduce your interest, pay your principal quickly and shorten the length of your mortgage. The site I like to use is from the Government of Canada and I have found it very useful. https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MCCalc-CHCalc-eng.aspx

  9. you guys are correct. recasting. and my loan provider also explained to me that the monthly pmt would not change until after the refi if i remember correctly. i looked into it for my own property.

  10. I’m old and i love your blog, but math or no math, there is no better feeling in the world than to have a paid off house.
    Then you can dump a lot of $ every month into laddered cd’s or stonks…or travel!
    Rent the place out and live in Viet Nam 🙂

  11. I’d be interested to see how this math changes for an investment property. Given that rental income is taxable and interest payments tax deductible, the decision to pay off vs keep the mortgage and invest the cash might change. Especially factoring in potential appreciation of the cash.

  12. re: Why is their retirement plan called a 401(k) and doesn’t have the word “retirement” in it? Who knows?

    I actually already knew why it’s called a 401(k) from a long time ago (1984) when I signed up for the 401(k) plan offered by my employer during the employee orientation the day I started working there. But here are a couple of Google results:

    1. These plans are named for the subsection of the U.S. Internal Revenue Service code they are found under: in this case, 401(k). [i.e., Section 401, Paragraph (k)]

    2. The catchy name comes from the section of the tax code — specifically subsection 401(k) — that established this type of plan.

    As to why the U.S. Internal Revenue Service doesn’t include the keyword “retirement” in Section 401, Paragraph (k) of its code, perhaps they are simply assuming the reader knows “Section 401, Paragraph K outlines the rules and guidelines surrounding employer profit sharing and stock plans, and most notably Employee Retirement Income Security Act (ERISA) plans.” It’s obvious: “retirement” is the “R” in the Government’s jargon acronym. LOL

    Oh, and we are in the process of paying off our low interest (under 4%) US ACTUAL FIXED mortgage (despite having access to high interest saving account rates over 4%) just for the peace of mind of having no mortgage.

  13. As has already been said, the mathing didn’t take into account what you do with the cash that isn’t being used to pay off a mortgage early.

    My thinking has been that in an environment where my mortgage rate is around 3%, I’m better off investing my money than making extra payments. If and when my mortgage renews at a significantly higher rate, I cash out those investments and throw the cash at the mortgage. The biggest risk is if I have to pull out my investments during a down market. Discounting that, if I’m making 7% on my investments and paying 3% in interest, I’m financially ahead vs. just paying down the mortgage, and that has been the case for the last 5 years. I’ve also been more liquid, which is handy if unexpected expenses come up.

    If and when we renew at a significantly higher rate, I’ll definitely be changing my strategy, but it won’t have changed the fact that in the last 5 years I’ve been borrowing for less money than the market returned to me.

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