So you’ve done your research and shopped around for the best mortgage rate – so what’s the next step? It’s time to tackle those mortgage payments! Many homeowners only think of paying for their mortgage monthly. But did you know that changing your payment schedule can mean paying off your mortgage in less time? You might be facing that mortgage for up to 25 years (or 30 if you don’t require CMHC insurance). Many homeowners only scratch the surface of their debt in the first few years, mainly paying off the interest before they even get to the principal. But this doesn’t have to be the case – there are options available to help you enjoy a mortgage-free lifestyle sooner rather than later.
This is the traditional mortgage payment type, paid monthly on the same day each month.
You make payments every second week on the same day i.e. every second Wednesday. You’ll end up saving a bit of interest in the long run because you’re making the payments slightly quicker. Bi-Weekly Payments = (Monthly Payment*12)/26
Also known as accelerated bi-weekly mortgage payments, these are paid every two weeks. This allows you to pay off your mortgage quicker as you’ll be paying half of your monthly payment every other week - meaning that you end up making an extra payment each year. Bi-Weekly Rapid Payments = Monthly Payment/2
You’ll be paying four equal payments four times a month (i.e. the 1st, 7th, 21st and 28th of the month) totalling 52 payments a year. While this option offers some interest savings, it doesn’t make much of a difference. Weekly Mortgage Payments = (Monthly Payment x 12) / 52
Similar to bi-weekly rapid payments, you'll make slightly larger payments resulting in an extra payment being made throughout the year. This can save you thousands of dollars in interest and help you pay off your mortgage quicker. Weekly Rapid Mortgage Payments = Monthly Mortgage Payment / 4
Good question! The gist is – paying off your mortgage using either a bi-weekly rapid, or a weekly rapid payment schedule can save you tons on interest and help you become mortgage free much sooner, while bi-weekly, and weekly payments will have a minimal effect. Why is that? For example, if you were paying off your mortgage with an accelerated bi-weekly mortgage payment, you would end up making 26 “half” payments, the equivalent to 13 “full” payments. Comparatively, if you’re on a monthly repayment schedule, you would only make the standard 12 full payments. In this scenario you save a lot on interest by paying an extra payment each year.
Let’s take a look at some numbers: if you have a $250,000 mortgage at 4% interest and amortized over 25 years, traditional monthly payments would be $1315.05. However, by simply switching to accelerated bi-weekly payments (every two weeks) with payments of $657.52, you could pay your mortgage off within 21 years rather than 25 and save $20,454 in interest. (Yes that’s right – over $20K!) Now what if you switched to a weekly rapid payment schedule? Your weekly payments of $328.76 would save you $20,680 in interest, and you will be mortgage-free in the 20th year! Being mortgage-free five years sooner can be a reality.
Loan Amount: $250,000 Rate: 4% Amortization: 25 years
While accelerated mortgage payments prove to pay off your mortgage a lot sooner than traditional monthly payments and can save you thousands of dollars, it may not be the right option for you - it’s always important to look at all of the options available before signing up for an accelerated mortgage. Purchasing a home is the biggest investment you will ever make - an investment towards your future. With accelerated mortgage payments, you are quite literally accelerating to a future of living mortgage-free and enjoying financial freedom. Now that’s wise thinking!