Why you should do an accelerated bi-weekly mortgage payment

When it comes to paying your monthly mortgage costs, you’ll be surprised that you have a couple of options. In fact, there are six different payment schedules to choose from: monthly, semi-monthly, bi-weekly, accelerated bi-weekly, weekly, and accelerated weekly. 

However, in Canada, the most common mortgage payment frequency is monthly. This means that in one year, you’re making 12 total payments towards your mortgage. Like clockwork, payments are due in the same amount, on the same day, every single month. 

But what many people might not realize is that there is the option to choose a bi-weekly mortgage payment plan–and this could be a game changer when it comes to paying your mortgage off even faster.

Understanding each payment schedule

In order to understand the benefit of an accelerated bi-weekly mortgage payment, it’s important to breakdown what the other payment schedule type means: 

• Monthly: Most often the default payment schedule provided by your lender, you’ll make 12 payments a year on the same day of each month (usually the first). 
• Semi-monthly: Like its name suggests, with a semi-monthly option, you'll pay your mortgage twice a month (either the 1^st and 15^th, or the 16^th and end of month). Overall, the yearly mortgage payment you’ll make will be the same as if you did monthly payments. 
• Bi-Weekly: With a bi-weekly payment schedule, you’ll need to multiply your monthly mortgage payment by 12 and then divide by 26 (the amount of pay periods in a year). Similarly, this will be the same outcome as if you picked a monthly mortgage payment option. 
• Weekly: In a weekly situation, you’ll make a payment every seven days. In this case, you’d multiply your monthly mortgage amount by 12, then divide by 52 pay periods in the year. Overall, the amount you’d pay each year would be the same as if you were on a monthly payment schedule.
• Accelerated weekly: In this case, you need to divide your monthly mortgage cost by four, and then pay that over 52 weeks, resulting in your mortgage payments being slightly higher, compared to a weekly schedule. 

What is an accelerated bi-weekly mortgage payment? 

Now, with the accelerated bi-weekly payment option, you’ll divide what your monthly mortgage payment would be by two, then pay that over 26 pay periods. In this situation, you’ll actually be paying a bit more than if you were just doing a bi-weekly payment schedule, overall equating to about an extra payment or two made each year. According to a report from the Canadian Association of Mortgage Professionals, nearly 40% of Canadians choose accelerated bi-weekly payments when given the option. Those who select this method pay off their mortgages, on average, 3-4 years sooner than those on a traditional monthly plan.

Although that means your yearly mortgage payments are slightly higher, this additional payment helps you cut down on total interest costs and the number of years left on your mortgage. 

Financial Implications of Accelerated Bi-Weekly Payments

When diving into the financial aspects of accelerated bi-weekly payments, it's pivotal to comprehend the long-term implications it holds for your mortgage journey. The accelerated bi-weekly payment method, as opposed to traditional monthly or semi-monthly payments, inherently involves making payments every two weeks, totaling 26 payments per year. This essentially translates to making an extra monthly payment annually, which can significantly impact your mortgage's principal amount and the interest accrued over time.

A Closer Look at the Numbers

Let's delve into a numerical example to illustrate the potential savings and benefits of opting for an accelerated bi-weekly payment schedule. Consider a $300,000 mortgage at a 2.69% interest rate, with a 5-year term spread over a 25-year amortization period. If you were to choose a monthly payment plan, your payment would amount to $1372.45. However, with an accelerated bi-weekly plan, your payment would be half of the monthly amount, i.e., $686.23, but due to the additional payments made annually, the effective amortization reduces to 22.3 years, which is 2 years and 9 months earlier than the original schedule(Note: the figures utilized in the numerical example above are selected arbitrarily and are intended solely for illustrative purposes)

The Impact on Interest and Principal

The additional payments made annually through the accelerated bi-weekly schedule are applied directly to the principal amount, thereby reducing the overall interest paid over the life of the mortgage. This not only allows you to build equity in your home at a faster pace but also ensures that you are debt-free sooner than you would be with other payment schedules.

Aligning Payments with Your Financial Flow

Moreover, the accelerated bi-weekly payment schedule can be strategically aligned with your financial inflow, especially if you receive a bi-weekly paycheck. This alignment ensures that a portion of your income is automatically allocated towards your mortgage payment, facilitating smoother financial management and budgeting. It allows you to systematically chip away at your mortgage without feeling the financial strain of a large monthly payment.