What to pay off first: mortgage or line of credit?

Pay off the debt with the highest interest first

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Q: We are currently in position to either pay down our lines of credit or pay down our mortgage. We recently sold one property and renovated and moved into another. The lines of credit were used to help renovate the property we just moved into. We now find ourselves in a debt vs debt standoff. Do we use the money to pay off the mortgage, leaving us with about $70,000 owing and about $150,000 on a line of credit, or do we tackle the line of credit, which would leave us with $15,000 in the bank and a $290,000 remaining mortgage? — Debt vs. Debt, Aurora, Ont.  


Answer 1: As with any debt, pay off the one with the highest interest first. Mortgages tend to have unfavourable interest and compounding structure, making them the better bet to pay down first. Lines of credit have more simple interest calculations, making them easier to pay down over time. I have clients who have taken out lines of credit to pay off their mortgages, once they got low enough. If you create a spreadsheet and calculate the total interest paid on the mortgage and the lines of credit, the answer will be obvious.

RE Expert - Laurin JeffreyLaurin Jeffrey is a realtor with Century 21 Regal Realty Brokerage. He’s a history geek and photographer and specializes in lofts and unique properties. He can be found online at www.jeffreyteam.com.


Answer 2: I’m not a financial planner, I’m a real estate agent, but in my opinion you should always pay off the debt that has the highest interest rate—typically the line of credit. Remember a lot of people will refinance their home to pay off high interest debt, because mortgage rates are so low. Also by paying off the line of credit, it gives you access to that money again, should you need it for an emergency.

RE EXPERT - Alexsandra OleksakAleksandra Oleksak is a sales representative for Sage Real Estate, buying, selling and renovating her way through one of the top cities to live in. She is a Torontonian who loves the city and is passionate about its real estate. When she’s not out in the real estate trenches making the real estate process for buyers and sellers fun and stress free, you can catch her on her snowboard exploring the world.


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4 comments on “What to pay off first: mortgage or line of credit?

  1. Rates are good and getting rid of a mortgage is money in the bank. Your equity is your savings. You could consolidate all your debts on a LOC and start to nail it down with no penalties for over payments like a true mortgage. If you find the rate too high on a regular LOC use the equity in your home for a home equity line. You will still have the ability to pay down faster with a low rate and will still avoid those pre payment charges. Yes some of your equity will be tied to the LOC but with low rates and a descending balance, it will get you closer to being debt free.

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  2. We are in very similar situation and have chosen to pay the mortgage first despite a slightly higher interest rate. My concern was since money is tight, a mortgage payment is not flexible. If money were tight one month, we could skip a line of credit payment or make a payment and take it right out. On a mortgage, we are committed to that payment. The interest rates are less than 1/2 percent apart so there is not a huge loss, the ease of line of credit payments more than make up for it. Also no restrictions on extra payments should money come in.

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  3. You should pay off the debt with the highest after tax rate. If the interest is tax deductible on one of the debts and the other is not, you need to consider the tax savings from the interest deduction in determining which debt carries the highest cost.

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  4. I have 87K in stocks and owe 48k in my line of credit. I would like to get a rental property, should I sell my stock and pay off my line of credit so I can buy a rental unit.

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