Last Updated on July 20, 2024 by Finance Faded
If you’re reading this article, you’re probably already a homeowner or well on your way to becoming one. In any case, congratulations on your decision.
When it comes to investing, I don’t subscribe to the idea that it’s better to focus solely on the stock market and ignore real estate, or vice versa. You can read my recent article “Rental Houses or Stock Investments?” for insights into both topics.
Real estate and the stock market are like water and fire. When it’s scorching hot, you drink water to cool down. But when you’re hungry, you need fire to cook a good meal. It’s crucial to have both at your disposal. The key is knowing how to manage them to avoid getting burned or drowning.
A few years ago, Mrs. Finance Faded and I made the decision to buy our first home after renting for many years (with some impressive savings!). It was a moment filled with emotions, pride, and a sense of accomplishment. Unfortunately—or fortunately, depending on how you look at it—during this proud moment, we overlooked an important detail: the payment options of our mortgage.
Like many people, our banker presented us with a default monthly payment plan without mentioning other available options. Without further research (emotions and pride were running high), we accepted the banker’s offer. Over the years, Mrs. Finance Faded, as usual, meticulously reviewed all the documents we had signed and recalculated everything. To her surprise, she discovered a better option that allowed us to pay off our mortgage faster and pay less interest. So, we switched to this better option for our subsequent mortgages, which I discuss in this article.
Examples are provided to compare different payment options. While these examples are specific to the Canadian context, you can likely find similarities in your own country. As you can see, this blog is serious about helping you save money, no matter where you live!
Mortgage Payment Frequency Options
Choosing the right mortgage payment frequency is crucial for managing your finances effectively and achieving mortgage freedom sooner. The frequency you select can make a substantial difference in the total interest paid and the speed at which you pay off your mortgage.
Here’s why it matters: opting for accelerated payment schedule can reduce the amount of interest you pay over time. By making smaller, more frequent payments, you not only decrease the principal faster but also reduce the interest-carrying costs. This approach accelerates your journey towards owning your home outright.
In Canada, there are several mortgage payment frequency options, though some lenders may not offer all of them: Monthly, Semi-monthly, Bi-weekly, Accelerated Bi-weekly, Weekly, Accelerated weekly.
A. Monthly payments
One payment is made each month leading to twelve payments per year. This option is common and convenient because payments are usually made on the same day each month making it easier to keep track of your payment due date.
B. Semi-monthly payments
Semi-monthly payments mean you will divide the monthly payments into 2 and pay that amount twice monthly for 24 payments during the year. With this payment schedule, you can choose any 2 days per month to make the payment, but they must be at least 15 days apart within a 28-day monthly cycle. For example, one could choose 1st and 15th of the month.
C. Biweekly payments
Bi-weekly payments are made every two weeks resulting in 26 payments annually. Many homeowners receive two paychecks a month, so using this plan allows you to align their cash flow with your mortgage payments. Bi-weekly payments are equivalent to multiplying the monthly mortgage payment by 12 and then dividing by 26 (given that there are 52 weeks in a year).
D. Accelerated Bi-weekly payments
This is the payment frequency option that Mrs. Finance Faded and I opted for with our mortgages. The accelerated bi-weekly payments are similar to regular bi-weekly payments in terms of frequency, but each payment is slightly higher (because it is equivalent to paying the half of the monthly payment), which could lead to paying off the mortgage faster and reducing overall interest paid.
E. Weekly payments
Weekly payments mean you will make a payment every week for 52 payments a year.
F. Accelerated weekly payments
Accelerated weekly payments entail making a payment each week for a total of 52 payments annually, similar to a standard weekly payment schedule. However, under an accelerated payment structure, you effectively distribute the equivalent of an additional monthly mortgage payment across the entire year.
Summary & Remarks
Your mortgage payment frequency options may include:
- Monthly: 1 payment per month
- Semi-monthly: 2 payments per month (monthly payment ÷ 2)
- Biweekly: 1 payment every 2 weeks (monthly payment x 12 ÷ 26)
- Weekly: 1 payment per week (monthly payment x 12 ÷ 52)
- Accelerated bi-weekly: 1 payment every 2 weeks (monthly payment ÷ 2)
- Accelerated weekly: 1 payment per week (monthly payment ÷ 4)
Note that certain lenders provide accelerated options exclusively for biweekly and weekly payments, while others may limit certain products, like variable mortgages, to monthly payments only. Furthermore, some lenders compound interest according to the payment frequency for their variable mortgages, potentially making it a costlier option.
Example: $400,000 Fixed-Rate Mortgage at 5.14%
Table 1: Comparing Mortgage Payment Options
| Payment Frequency | Mortgage Payment | Interest Paid 5-Year Term | Interest Paid 25-Year Amortization | Amortization Savings (vs Monthly) | Interest Savings (vs Monthly) |
|---|---|---|---|---|---|
| Monthly | $2,359 | $96,299 | $307,215 | Not applied | Not applied |
| Semi-Monthly | $1,179 | $96,137 | $306,010 | About 1 month | $1,205 |
| Bi-weekly | $1,088 | $96,124 | $305,895 | About 1 month | $1,320 |
| Accelerated Bi-weekly | $1,179 | $94,506 | $256,667 | About 3 years and 6 months | $50,548 |
| Weekly | $544 | $96,046 | $305,202 | About 1 month | $2,013 |
| Accelerated Weekly | $589 | $94,421 | $256,083 | About 3 years and 6 months | $51,132 |
Conclusion
Figures from Table 1 show that Accelerated mortgage payment frequencies offer significant advantages in terms of interest savings and reducing the amortization period. These options involve making an additional monthly payment spread over the year, enabling you to reduce your mortgage principal more rapidly.
Opting for an accelerated payment plan can substantially shorten the duration of your mortgage and result in substantial interest savings. However, it is important to note that not all lenders provide accelerated payment options. Therefore, if this is a critical component of your mortgage strategy, it is essential to verify with your lender whether this option is available.
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Share Your Experience
Have you encountered similar challenges or insights with mortgage payments? Share your story or questions in the comments below.
Disclaimer: While I strive to provide valuable information, I am not a financial advisor. The content on this page is intended for informational purposes only and should not be taken as financial advice. To choose the financial asset that best fits your individual profile, consult with a professional financial advisor and discuss your specific circumstances.
