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

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

Pay off the debt with the highest interest first


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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