• Which Payment Frequency Is The Best For You?

  • Buying your first home can be a daunting process including figuring out the right mortgage and options for you. One part of this is knowing about what Payment Frequency to select. Here let’s talk about its definition and what it really means, the options available and how do you choose the right one for you?

    Definition: Payments consisting of both a principal and an interest component, paid on a regular basis during the term of the mortgage. Refers to how often and when you can make these payments.

    Which Payment Frequency Is The Best For You?

    Options:

    • Monthly (any day of the month usually between the 1st and 28th )
    • Weekly (any day of the work week, 52 payments per year)
    • Bi-Weekly (every other week, 26 payments per year)
    • Semi-Monthly (twice per month, 24 payments per year, e.g. on the 1st and 15th of each month
    • Plus accelerated weekly and bi-weekly

    What is an accelerated bi-weekly payment?

    • Accelerated Bi-Weekly payments are exactly half of a regular monthly payment amount BUT it is collected every two weeks
    • This means you make 26 payments per year
    • For example, if the monthly payment is $1,000 then the accelerated bi-weekly payment will be $500
      • If you paid monthly you would pay $1,000 x 12 months = $12,000 per year
      • Paying accelerated bi-weekly you would pay $500 x 26 = $13,000 per year
    • This results in you paying an extra $1,000 off your mortgage each year – hence accelerating how fast you pay it back!
    • Remember, twice a year you will have three payments in one month
    • Accelerated weekly refers to monthly payment divided by 4!

    What is a non-accelerated bi-weekly payment?

    • Non-accelerated is taking the regular monthly payment and times by 12 months, then
    • Divide this into 26 payments
    • For example, if the monthly payment is $1,000 then the non-accelerated bi-weekly payment will be $461.54
      • If you paid monthly you would pay $1,000 x 12 months = $12,000
      • Paying non-accelerated bi-weekly you would still pay $12,000 = $461.54 x 26 = $12,000
    • This results in you not paying any extra off your mortgage each year – hence non-accelerating
    • Remember, twice a year you will still have three payments in the one month

    So let’s compare the payments and savings between these two options; regular monthly and accelerated bi-weekly payments:

    $250,000 mortgage with a 25 year amortization at 3.39% 5 Year Fixed Term

    Regular Monthly Over 5 Year Term

    • Monthly payment = $1,233.70
    • Total Payments each year = $14,804.40
    • Total Payments in 5 Years = $74,022.00
    • Total Interest Paid in 5 Years = $39,285.61
    • Total Principal Paid in 5 Years = $34,736.61
    • Balance owing in 5 Years = $215,263.39
    • Effective amortization = 25 years

    Accelerated bi-weekly Over 5 Year Term

    • Monthly payment = $1,233.70/2
    • Bi-Weekly Payment of $616.85
    • Total Payments each year = $16,038.10
    • Total Payments in 5 Years = $80,190.50
    • Total Interest Paid in 5 Years = $38,680.82
    • Total Principal Paid in 5 Years = $41,510.98
    • Balance owing in 5 Years = $208,489.02
    • Effective amortization = 22 Years 2 Months

    The real difference is YOU paid an extra $6,168.50 off your mortgage which took 2 years and 10 months off your mortgage and saved you $604.79 in interest

    So how do you select the right one for you?

    • Determine which payment option you actually qualify for
    • Review what payment options the lender offers
    • Consider aligning your payment frequency with how often you get paid each month e.g. if you are paid every two weeks, then
    • consider accelerated bi-weekly payments to align with each paycheque
    • The more often you pay, the less interest you will pay
    • You can always adjust this at any time and change

    My recommendation: Pay accelerated bi-weekly if you can afford it, as it forces you to pay more. By paying your mortgage off sooner you will reduce your debt and save unnecessary interest – plus a forced savings plan for the future!