So you've found your dream home and have signed on for your mortgage. Now you're all set - for years of debt repayment. Technically, you don't own your home until you've paid off your mortgage in full - it belongs to your mortgage lender. The good news, is that you do have options to pay your mortgage off faster, own your home sooner and pay less in interest payments on your mortgage - you just need to shake up your mortgage payments.
What is a Mortgage Payment?
Your mortgage payment is made up of two different parts: the principal (the money borrowed) and the interest (the fee charged for lending the money). The more money you can pay as a down payment, the less you will need to borrow, resulting in less interest paid over the length of the mortgage.
Many lenders will offer you different payment options such as:
- Monthly
- Bi-weekly
- Bi-weekly rapid or accelerated
- Weekly
- Weekly rapid or accelerated
What is a Monthly Payment?
This tends to be the most common option - your mortgage payment will be withdrawn from your bank account once a month, i.e. on the 1st day of each month.
What is a Bi-Weekly Payment?
Your mortgage payments are taken twice a month, such as the 1st and the 15th and are 1/2 of the monthly amount. So you end up paying the same amount over the course of the year as you would with the monthly option.
Example:
If you pay $1,000 per month X 12 months = $12,000, with the bi-weekly option you would pay $500 twice a month.
This option is useful if you wish to match your mortgage payments with your paycheque if you get paid every two weeks.
What is a Bi-Weekly Rapid or Accelerated Payment?
Your mortgage payments are half of the monthly payment amount, but they are collected every two weeks instead of just twice monthly.
Example:
If your monthly payment is $1,000 then the bi-weekly rapid payment will be $500. Payments are made on the same day every second week, meaning at least twice per year, you will make three payments in one month.
Instead of $500 X 25 = $12,000, your payments will be $500 X 26 = $13,000.
The amount of interest is the same, therefore, the additional payment of $10,000 will be deducted from the balance owing on your mortgage.
You will also make an extra small deduction from the mortgage balance because you are making small payments faster than if they were larger, once a month payments.
What is a Weekly Payment?
This option takes your monthly option multiplies it by 12 months and divides it by 52 weeks in a year. Again, you pay the same amount in a year as the monthly option.
A very small amount of savings may be gained due to 3/4 of your payment being made early each month. Again, this may be a good option if you wish to match your mortgage payments with your payday.
What is a Weekly Rapid or Accelerated Payment?
This option is the same as bi-weekly rapid, except that the payments occur on the same day every week, meaning your payments will be 1/4 of your normal monthly payment.
Sometimes there are five weeks in the month and you will have five payments in that month. This will happen at least four times a year.
What are 20/20 Prepayment Options?
During your mortgage search you may see terms such as 10/10 or 20/20 which are sometimes referred to as prepayments, double up payments or lump sum payments. These refer to two types of additional payments that lenders allow you to make: one- off payments and increases to your normal payments.
For example, a 20/20 prepayment option would be broken down as follows:
- The first 20 means you could pay a lump sum up to 20 per cent of the value of the original principal once annually
- The second 20 means you could increase your normal weekly/bi-monthly/monthly payments by up to 20%
If you can afford it, making these additional payments can save you loads of money over the course of the mortgage as you will be reducing the principal more quickly; hence, reducing the interest you will have to pay. Each lender has different guidelines and rules, so be sure to check the fine print of your mortgage agreement!
