When it comes to your mortgage there are a lot of options to choose from and details to go over. These can sometimes be unclear, especially if you’re a first time home buyer. Things like a fixed or variable rate might not mean anything to you right now, but that’s okay! Your Calagry mortgage broker will help you learn the ins and outs of the options that will benefit your unique situation, however it’s still very important for you to understand your mortgage options fully. This includes understanding your mortgage payment frequency, and which option will benefit you most.
In Canada, there are three frequencies in which you can pay back your mortgage, those are: monthly, bi-weekly, and accelerated bi-weekly. Clients asking about their mortgage payment frequency is a popular topic. I would like to break this down for you here to show the difference that mortgage payment frequency can make.
For simplicity’s sake, let’s use the following financials for our calculations:
The mortgage is $300,000.
With a 10% down payment of $30,000.
The mortgage rate sits at a fixed 2.94%.
And the amortization period is 25 years.
Monthly Mortgage Payments
Monthly mortgage payments mean that you will deliver 12 payments a year throughout your amortization period. With Insurer Premium* included, this would equal $1,308.82 per month with our example above.
$1,308.82 is the monthly payment amount.
Regular Bi-Weekly Mortgage Payments
This payment frequency means that you would make a payment every 2 weeks. This is a very popular option for a lot of people who receive bi-weekly paychecks from their employer because it makes it a little easier to plan their budget. To determine how much this payment would be, we multiply the monthly payment by 12, then divide it by 26 payments. Dividing by 26 payments comes from the fact that regular bi-weekly payments are made twice a month, there are 12 months in a year, therefore 12 x 2 = 26. So, if the monthly payment is $1,308.82 x 12 = 15,705.84 divided by 26 = $604.07
$604.07 is the total regular bi-weekly payment.
Accelerated Bi-Weekly Mortgage Payments
Take the monthly payment and divide it by 2. $1,308.82 / 2 = $654.41.
$654.41 is the accelerated bi-weekly mortgage payment.
Notice that the bi-weekly payments, though paid in the same frequency, are not the same amount.
So, how much will you pay annually? Simply multiply your payments by its frequency!
Monthly: $1,308.82 x 12 = $15,705.84
Regular Bi-Weekly: $604.07 x 26 = $15,705.82
Accelerated Bi-Weekly: $654.41 x 26 = $17,014.66
The bi weekly accelerated payment takes off an additional 2-years off your mortgage!
Let’s get something clear. Bi-weekly payments do NOT mean less interest per month. The interest payments end when the loan is paid off, so because you’re paying off your mortgage faster you are saving that money.
Some questions remain:
Do you have the funds to pay the accelerated mortgage payments?
The accelerated mortgage payments are a little extra money a month. Some people don’t want to add on more money to their monthly payments, or can’t afford it in their current situation.
Would you rather budget your expenses on a bi-weekly basis?
Many people take the opportunity of regular bi-weekly payments to correlate their paychecks with their payments. This method depends on how you structure your financial budget.
I advise all my clients to sit down with me and have a discussion about their goals. Together, we come up with a mortgage strategy that will benefit my client in the long term. This is a crucial step toward financial freedom. It goes hand in hand with retirement planning, estate planning, and other financial matters.
If you do not have a mortgage strategy, I encourage you to contact your mortgage broker and start talking about it!