When it comes to paying your monthly mortgage costs, you’ll be surprised that you have a couple of options. In fact, there are six different payment schedules to choose from: monthly, semi-monthly, bi-weekly, accelerated bi-weekly, weekly, and accelerated weekly.
However, in Canada, the most common mortgage payment frequency is monthly. This means that in one year, you’re making 12 total payments towards your mortgage. Like clockwork, payments are due in the same amount, on the same day, every single month.
But what many people might not realize is that there is the option to choose a bi-weekly mortgage payment plan–and this could be a game changer when it comes to paying your mortgage off even faster.
Understanding each payment schedule
In order to understand the benefit of an accelerated bi-weekly mortgage payment, it’s important to breakdown what the other payment schedule type means:
- Monthly: Most often the default payment schedule provided by your lender, you’ll make 12 payments a year on the same day of each month (usually the first).
- Semi-monthly: Like its name suggests, with a semi-monthly option, you'll pay your mortgage twice a month (either the 1st and 15th, or the 16th and end of month). Overall, the yearly mortgage payment you’ll make will be the same as if you did monthly payments.
- Bi-Weekly: With a bi-weekly payment schedule, you’ll need to multiply your monthly mortgage payment by 12 and then divide by 26 (the amount of pay periods in a year). Similarly, this will be the same outcome as if you picked a monthly mortgage payment option.
- Weekly: In a weekly situation, you’ll make a payment every seven days. In this case, you’d multiply your monthly mortgage amount by 12, then divide by 52 pay periods in the year. Overall, the amount you’d pay each year would be the same as if you were on a monthly payment schedule.
- Accelerated weekly: In this case, you need to divide your monthly mortgage cost by four, and then pay that over 52 weeks, resulting in your mortgage payments being slightly higher, compared to a weekly schedule.
What is an accelerated bi-weekly mortgage payment?
Now, with the accelerated bi-weekly payment option, you’ll divide what your monthly mortgage payment would be by two, then pay that over 26 pay periods. In this situation, you’ll actually be paying a bit more than if you were just doing a bi-weekly payment schedule, overall equating to about an extra payment or two made each year.
Although that means your yearly mortgage payments are slightly higher, this additional payment helps you cut down on total interest costs and the number of years left on your mortgage.
How much can you save on an accelerated bi-weekly mortgage payment schedule?
Let’s say you have a $300,000 mortgage on a 25-year amortization period and a 4% interest rate. The primary benefit to choosing a bi-weekly payment is the ability to pay off your mortgage faster. This increased payment schedule will help you cut down on thousands of dollars in interest over a 25 year amortization period.
Is an accelerated bi-weekly payment schedule right for you?
While there are definite benefits to an accelerated bi-weekly payment schedule–who doesn’t want to pay less interest and get out of debt faster–it is important to consider all the factors:
- You can track your payments easier, sort of: One reason an accelerated bi-weekly payment could be beneficial to you is it allows you to budget smarter. If you’re paid bi-weekly, it could mean your mortgage payments would line up with the timing of your paycheque, so instead of having to set aside money for a large monthly payment at the end of the month, you can allocate a mortgage payment from each pay day, giving you a bit more flexibility over managing your cash flow.
- You pay less interest: Because you’ll be paying your mortgage off at a bit of a faster frequency, you’ll be cutting back on the overall interest you have left on your mortgage loan.
- Repay your mortgage faster: In fact, paying off your mortgage through accelerated bi-weekly payments also means building equity in your home at a faster pace. If you have extra cash-flow during a certain month, you can also consider making a lump-sum payment towards your mortgage to take advantage of leveraging even more equity. With that said, this could shorten your amortization period, with the difference being even a couple months worth.
- Consider your other debts: Given that you’ll be paying your mortgage off two times more than if you did on a monthly or semi-monthly schedule, it might put a little strain on your wallet during certain times of the year. If you have other debts like credit cards or car loans that you need to pay off, it’s important to understand you might not save as much as you want to. You’ll want to keep your debt ratios and credit score in good standing.
- Check your emergency fund: While it’s definitely a plus to be able to pay your mortgage off in time, always make sure you have some wiggle room with an emergency fund. In a worst-case scenario, you never want to be caught off guard and have to take out another loan to help pay debts, just because you’ve put even more cash towards your home.
Accelerated payments will put you ahead
All in all, an accelerated bi-weekly mortgage payment could be the revolutionary change you need to pay off your mortgage faster–not to mention, the added benefit of building more equity in your home and saving thousands in interest fees. So if you think you can have a pretty good grasp on your finances by doing an accelerated bi-weekly payment schedule, this might be a great option for you.
And, if you’re interested in learning how to change your payment plan into an accelerated bi-weekly schedule, one of Pine’s mortgage advisors would be happy to speak with you.