Whether purchasing for your first or third time, there are a number of decisions you’ll
have to make surrounding your home purchase and corresponding mortgage.
One of those decisions is the payment frequency.
In Canada, you can choose between a monthly, a bi-weekly, or an accelerated bi-weekly payment.
We’ve brought in Mortgage Broker Chris Molder to walk you through each option and explain
what they mean for your repayment plan.
Mortgage payment frequencies means more than how often you pay your lender.
It also affects how quickly you pay down your mortgage balance.
Let’s consider John.
John has recently purchased a home for three hundred thousand dollars, put ten per cent
down, and was approved for a two-point-nine-four percent fixed rate mortgage amortized over
twenty-five years.
Let's consider John's monthly payment first.
Using a mortgage calculator, we've determined that John's monthly mortgage payment is one
thousand two hundred and ninety-five dollars.
If John were to make regular bi-weekly payments, he'd be making a mortgage payment once every
two weeks.
Bi-weekly payments are popular because you can coincide your mortgage payment with your
bi-weekly pay schedule.
To determine John's regular bi-weekly payment amount, we take his monthly payment, which
is one thousand two hundred and ninety-five dollars, multiply it by twelve, and divide
it by the twenty-six bi-weekly pay periods in the year.
In this case, John’s regular bi-weekly payment amount is five hundred ninety-seven dollars
and sixty-nine cents.
John’s final payment option is accelerated bi-weekly.
To calculate his accelerated bi-weekly payment, we take John's monthly payment, which is one
thousand two hundred and ninety-five dollars, divide it by two, and we get the number six
hundred forty-seven dollars as his bi-weekly accelerated payment.
Now, even though he's paying once every two weeks with the regular bi-weekly payment and
accelerated bi-weekly payment, the accelerated bi-weekly payment amount is higher.
Let’s have a look at the numbers and determine if John is able to pay off his mortgage more
quickly with the accelerated option.
Now, let's have a look at John's annual mortgage payment to the lender under the different
payment frequencies.
To determine how much John pays the lender annually for monthly mortgage payments, all
we do is multiply his monthly mortgage payments by twelve, and we determine that he pays the
lender fifteen thousand five hundred forty dollars to the lender.
For bi-weekly payments, we do a similar calculation, except this time we multiply by twenty-six.
With regular bi-weekly payments, we determine that John pays, again, fifteen thousand five
hundred forty dollars to the lender in principle and interest.
This is very similar, or actually, the same, as monthly payments.
And finally, we consider accelerated bi-weekly payments.
Again, multiplying by twenty-six, we’re able to determine that John pays annually
to his lender sixteen thousand eight hundred thirty-five dollars.
Now, as you can see John pays more annually under the accelerated bi-weekly payment plan.
Although he’s making an extra monthly payment per year, this accelerated bi-weekly payment
allows John to pay off his mortgage years sooner and save himself thousands of dollars
in interest.