I like to think of myself as an expert, I’ve put in my 10,000 hours, I know mortgages, as I like to say, “I’m a one-trick pony.” I only know how to do mortgages. I’m in big trouble if something happens to this gig. I digress.
The one question that is consistent across the board and what every client wants to know, what is my payment? Followed by what’s the difference between a bi-weekly payment or a bi-weekly accelerated payment? I pay my rent monthly, what’s the big deal with a bi-weekly accelerated payment. Or, my personal favourite, I have bi-weekly now, isn’t that the same as biweekly accelerated? I make 26 payments. Nope.
Not all payments are not created equal; let’s dig a little deeper and investigate the fascinating world of mortgage payments.
Why Choose An Accelerated Payment?
Accelerated payments are mortgage payments that are slightly higher, allowing you to pay down your mortgage principal faster. How fast? Typically you will shave an additional two and half years of interest off a twenty-five-year amortization during a five-year term. Let’s explore your options.
There are two types of accelerated payments: bi-weekly and weekly. Of the two options, bi-weekly accelerated is the most common option as it allows you to line-up your mortgage payments with paycheque deposits.
Types of mortgage payments:
Weekly, Bi-Weekly, Semi-Monthly, Monthly, Accelerated Bi-weekly, and Accelerated Weekly
Let’s do the math using payments of $1000.00
The monthly mortgage payment is $1,000 per month; you will make 12 monthly payments per year; totalling $12,000.00.
If you choose semi-monthly payments,
For example, on the 15th and 30th, Your payments will be $500.00 twice a month totalling $12,000.00 per year.
Which equals 24 payments per year.
Virtually the same as monthly.
No extra payments are going towards your principal amount.
Regular bi-weekly payments 26 payments per year
The math: $12,000.00/26 weeks = $461.50
Essentially the same as monthly. No extra payments are going towards the principal amount.
Accelerated bi-weekly payment. The best option when financially affordable.
The keyword is “Accelerated.” (Means to increase)
Accelerated bi-weekly payments are; the monthly payment divided by two, times 26 payments, allowing for two extra payments to be applied directly to the principal balance. Without being a heavy burden on your monthly budget. You’ll get used to the financial rhythm of the payments.
The Math: $1000.00 / 2 = $500.00 x 26 weeks = $13,000.00 – $12,000.00 = the extra $1000.00 goes directly towards the principal, saving you an additional 2.5 years of interest which reduces your amortization. And, it didn’t hurt a bit.
Accelerated bi-weekly payments are the preferred mortgage payment chosen by the majority of financial planners, mortgage brokers, and overbearing parents. wink
I want to think that my clients will make their annual lump-sum payments, but in truth, this rarely happens. Whenever possible and affordable, I strongly encourage my clients to use the bi-weekly accelerated payment along with an annual mortgage payment increase. Even an annual 10% increase to your mortgage payment will save you interest.
When you take one or both of these small actions, you are getting the best of both worlds. You are keeping your lifestyle and the family budget while paying down the mortgage principal at the same time. No need to feel guilty for missing the annual lump sum; you were making little sums along the way. These small measures that lead to significant results. It’s a Win-Win!
If you would like to discuss your payment options and how they affect the interest you pay, call me! I’m here to help.
Jacquie Bushell AMP
Let’s use my 14 years of knowledge and experience to help you navigate your mortgage needs. Jacquie Bushell 613 8823201 Jacquie@JacquieBushell.ca