Mortgage Matters: What's your right repayment option?
A little goes a long way with accelerated payments
Buying a home comes with a whirlwind of decisions: What can we afford? Which neighbourhood is best for our family? Should we go for a condo or a house? Can we live with that carpet? By the time you reach the mortgage paperwork, it’s tempting to just sign and get it over with. But don’t check out just yet!
There are still a few important decisions ahead, one is deciding your mortgage payment option. This decision doesn’t just affect how much and how often you pay — it can also make a big difference in what you end up paying over the life of your mortgage.
Monthly:
Monthly payments are the most straightforward and, more often than not, the most common. Your financial institution will withdraw your payment on the same day each month, which means just one payment to consider. If you continue to make monthly payments for your mortgage, you will pay it off at the end of the amortization term.
Semi-monthly:
A semi-monthly payment schedule means you make a mortgage payment twice a month on two set dates. For example, a mortgage payment would be made on the first and the fifteenth day of the month. With this repayment option, there will be a total of 24 payments per year.
Calculate: Take your monthly mortgage payment and divide it by two to see how much each semi-monthly payment will be.
Biweekly:
Biweekly payments mean you make a mortgage payment every two weeks for a total of 26 payments per year. This won’t pay your mortgage off any sooner than monthly payments, but if you’re paid biweekly, this might be more convenient.
Calculate: Take your monthly mortgage payment, multiply by 12 for a year, then divide by 26.
Weekly:
With weekly payments, you make a mortgage payment each week, all year long. This method won’t pay your mortgage off any sooner than monthly payments, but it may be a benefit for your particular financial situation.
Calculate: Take your monthly payments, multiply by 12 for a year, then divide by 52 weeks.
Accelerated Biweekly:
Accelerated payments allow you to pay your mortgage off faster, and therefore save on interest. Accelerated biweekly payments are similar to just regular biweekly payments, but they add an additional two payments over the course of the year.
Here’s how it works: You’ll be paying half of your monthly mortgage payment every two weeks, which results in two extra payments per year. Those two extra payments go directly to paying down the principal on your mortgage.
Calculate: Take your monthly mortgage payment, divide by two and pay this amount every two weeks.
Accelerated Weekly:
Like regular weekly payments, accelerated weekly payments are made each week, but they add four additional weekly payments per year.
Here’s how it works: You’ll be paying one-quarter of your monthly mortgage payment every week, which results in four extra payments per year. Those four extra payments go directly to paying down the principal on your mortgage.
Calculate: Take your monthly mortgage payment, divide it by four and pay this amount every two weeks.
To sum it all up:
When determining your payment schedule, your income and the kind of lifestyle you want to lead while paying your mortgage are important considerations. That said, if accelerated payment options are financially feasible for you, they offer significant benefits:
- Shorter amortization: Pay off your mortgage sooner.
- Save on interest: The quicker you pay off your mortgage the less interest you’ll be charged, which means more of your payments go towards paying off the principal.
Here’s an example of what you can save:
Biweekly: $400,000 mortgage, 5-year fixed term, 5.19% interest.
Payment (biweekly) $1,093.17 | Interest over 25-year amortization period $310,559.59.
Accelerated biweekly: $400,000 mortgage, 5-year fixed term, 5.19% interest.
Payment (biweekly) $1,184.94 | Interest over 25-year amortization period $259,201.20.
The accelerated option saves $51,358.39 in interest over the lifetime of the mortgage!
