Mortgage vs. HELOC
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When you purchase a mortgage you'll be glad to know that you have the flexibility to choose the frequency of your mortgage payments. Just because the default and most common payment type is a monthly payment does not mean that you can't choose a different payment type. The available payment types are: monthly, semi-monthly, bi-weekly, accelerated bi-weekly, weekly and accelerated weekly. The more frequently you make payments the more you end up saving on interest over the life of the mortgage. For maximum savings try an accelerated bi-weekly or accelerated weekly payment frequency.
Let's use the following example:
This is the default and most common mortgage payment schedule. The payment gets withdrawn from your account once per month. Therefore, you end up making 12 payments per year.
Based on the example above, each monthly payment would be $1,248.18.
The amount of interest paid over the course of a 25-year amortization period would be $124,452.75.
Each payment is calculated by taking the monthly payment and dividing by two.
The payment gets withdrawn from your account twice per month (typically the 1st and 15th of the month).
With a semi-monthly payment frequency, you end up making 24 payments per year. Using the mortgage details in the example above, each payment would be $623.80.
Over a 25-year amortization period, you would save $169.91 in interest versus a monthly payment plan.Bi-Weekly (26 payments per year)
To calculate these payments, take the monthly payment and multiply by 12. Then divide by 26.
The payment gets withdrawn from your account every two weeks. It is a popular payment type as many people get paid bi-weekly and want to align their mortgage payments with their payday.
With a bi-weekly payment structure you end up making 26 payments per year. Using the mortgage details above, each payment would be $575.80.
Over a 25 year amortization period, you would save $182.99 in interest versus a monthly payment plan.
Take the monthly payment, divide by two and pay it every two weeks.
Note that each individual payment is higher than the regular bi-weekly payment amount. Choosing the accelerated bi-weekly payment frequency will result in you making one extra monthly payment per year.
Using the mortgage details above, the accelerated bi-weekly payment ends up being $624.09, which is very similar to the semi-monthly payment amount, but you make 26 annual payments, rather than 24.
With an accelerated bi-weekly payment frequency, you will pay off your mortgage 3 years sooner (in 22 years rather than 25) and save $16,421.21 in interest versus a monthly payment plan.
Take the monthly payment, multiply by 12 and divide by 52.
This payment structure results in 52 payments per year, or one per week. Using the mortgage details above, your weekly payments would be $287.84.
Over a 25-year amortization period, you would save $261.43 in interest versus a monthly payment plan.
Take the monthly payment and divide by four. Then pay every week.
Using the mortgage details above, your weekly payment would be $312.04.
With an accelerated weekly payment frequency, you will pay off your mortgage 3 years sooner (in 22 years rather than 25) and save $16,600.93 in interest versus a monthly payment plan.
The viability of each payment frequency depends on your own financial cash flows. Use a mortgage payment calculator to calculate the best payment frequency for your needs.
While accelerated bi-weekly and accelerated weekly payments can save you thousands of dollars in interest over the course of a long amortization period, for the majority of Canadians, these payment schedules are not practical. Moreover, paying a mortgage quicker may not be wise if you have higher-interest debt or better investment opportunities elsewhere.
As for the difference in interest when comparing monthly, semi-monthly, bi-weekly and weekly payments, it’s really negligible. For that reason, most new homeowners should simply pick the payment frequency that is easiest for them to manage.
An even easier way to save money on your mortgage is to use Rates.ca to compare Canada’s best mortgage rates and lock in a great deal from the start.