Weekly or bi-weekly mortgage payments have been growing in favour with home owners across Canada and many institutions now offer these payment options. The fascination with more frequent payment options is that if they are done correctly you can take several years off your mortgage amortization and thus own your home free and clear years ahead of paying on a monthly basis.
Why is this? The trick is in how the weekly or bi-weekly payment is calculated. To achieve the rapid amortization you would take the monthly payment amount and divide it by four (weekly payment)or by two (bi-weekly payment). By doing this you end up reducing your mortgage principal each year by the amount of the monthly payment.
A simple illustration will help explain. If for
example your monthly mortgage payment was $400.00 you would make a total
yearly payment of $4,800.00 (400 X 12 months). By dividing the $400.00
by 4 you would have a weekly payment of $100.00 and thus pay a total yearly
amount of $5,200.00 (100 x 52 weeks). Similarly by dividing the $400.00
by 2 you would have a bi-weekly payment of $200.00 and again pay a total
yearly amount of $5,200.00 (200 x 26 bi-weekly pay periods). You can see
from this example that both alternate payment methods result in an additional
$400.00 ($5,200 - $4,800) being applied to your mortgage each year which
comes directly off the principal. These accelerated payments can reduce
a 25 year mortgage amortization down to 21 years. That's four years of
mortgage payments saved. Since you pay your mortgage with "after tax"
dollars, think of what you would have to earn before taxes to see the
true impact of the savings.
We have included a chart below that compares the differences between a regular monthly mortgage payment, regular weekly or bi-weekly payment and rapid weekly or bi-weekly payment. You can also make use of the Mortgage Amortization Scheduler on our web site to play with various scenarios.
Another way to reduce your amortization and save money is by making lump sum payments towards your mortgage when they are permitted. These could be by way of a "double up" feature allowed on your regular payments at certain times of the year , mortgage payment increases, or lump sum reductions on the anniversary date or other permitted dates based on a percentage of your original mortgage amount. Whatever method you choose will have the effect of reducing your mortgage amortization and potentially saving yourself thousands of dollars.
One other way to manage mortgage debt is to utilize a product such as Manulife Bank's "Manulife One" account which combines your mortgage debt and regular chequing account as one product. This way every deposit you make to the account immediately reduces the debt while every withdrawal of course increases it. The idea is that by depositing your whole pay to this account you will receive the immediate benefit of reducing more of your mortgage interest expense than if you just paid the regular mortgage payment. This is a better option on an after tax basis than leaving some of your pay in a low interest savings account where anything it earns is taxable. You must however be comfortable seeing the large negative balance on your bank statement each month with the risk that you may never pay the mortgage down if you succumb to the temptation of continuously drawing up to the maximum of the credit line. If you currently max out your credit cards and any existing line of credit this may not be the mortgage product for you. We hope to do a review of this type of mortgage account before the end of this year.
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