When you are approved for a mortgage and decide on the amortization period, you then get to choose the frequency of your mortgage payments, or how often you want to pay. This is a pretty flexible mortgage element that allows Canadians to select from a variety of options. However, the more frequently you make your payments, the more you will save in interest over time.
What costs are factored into mortgage payments?
When you are considering your mortgage, remember that you aren’t just paying back the amount of the loan. A mortgage has two parts: the principal (your loan amount) and the interest.
Since interest is calculated on the amount of principal you owe, the longer you take to pay back your mortgage, the more interest you will end up paying. Again, this is why accelerated payments, which allow you to pay off your mortgage faster, work in your favour. You can potentially save thousands of dollars in interest over the life of your mortgage.
How are mortgage payments calculated?
This depends on the option you choose, but for this example, we will compare two popular options.
Accelerated bi-weekly vs. bi-weekly
Bi-weekly is every two weeks, right? So how does one end up being faster than the other? Here’s how this works.
With a bi-weekly payment, you multiply the monthly payment amount by 12 and then divide by 26 pay periods. The total amount that you pay per year will be the same as if you paid your mortgage monthly, however, breaking it up into smaller payments twice a month is often more manageable (especially when you time your payments to when you get paid.)
With accelerated bi-weekly payments, you divide the monthly payment by two and then multiply by 26. So, your individual payments will be a little higher than the regular bi-weekly amount, which in total equals out to about one extra payment per year. It may not seem like much to start, but over the course of time that will add up pretty quickly.
Here’s an example
To keep it simple, let’s pretend your monthly mortgage payment is $1,000.
- For a bi-weekly payment that would mean:
$1,000 x 12 = $12,000 per year
$12,000 / 26 = $461.54 for each bi-weekly payment
- An accelerated bi-weekly payment, however, will look like this:
$1,000 / 2 = $500 per accelerated bi-weekly payment
$500 x 26= $13,000 per year
As you can see, by choosing the accelerated bi-weekly payment, you are knocking off an extra $1,000 from your mortgage principal every year. By paying down more of the principal, you not only pay down the loan sooner — but you also pay less in interest over the life of your mortgage.
» DISCOVER: How much mortgage can you afford?
What options are there for mortgage payments?
Canadians have six options for mortgage payments.
- Monthly. Monthly mortgage payments are the default. You make 12 payments per year on the same day every month.
- Semi-Monthly. With this option, you make payments twice a month. Usually either the 1st and the 15th, or the 16th and then the end of the month. To get the semi-monthly payment amount, multiply your monthly mortgage by 12 and divide by 24. It’s the same total amount per year as with your monthly mortgage, just with smaller, more frequent payments.
- Bi-Weekly. You make payments every two weeks. So, take the monthly amount, multiply by 12 and divide by 26 pay periods. Again, you pay the same amount annually as you would if you paid monthly.
- Bi-Weekly Accelerated. With the accelerated option, you will do the math a little differently. Divide the monthly payment by two, then pay that amount for 26 pay periods. This way the individual payments are a little higher, which means in total you will be making about one extra payment every year.
- Weekly. You make weekly payments. Multiply the monthly amount by 12, then divide by 52. This will be the same amount annually as you would pay with monthly payments.
- Weekly Accelerated. You pay weekly but at an accelerated rate. So, your monthly payment is divided by four x 52. This is the same annual amount as you would pay with accelerated bi-weekly payments, i.e., about one extra payment per year.
There is no bad option, you need to choose what is best for you. But, as mentioned earlier, more frequent payments allow you to pay off your mortgage principal faster, which means that accelerated options can help you save thousands of dollars in interest. So, it is in your best interest to consider accelerated mortgage payments if it is affordable.
When are mortgage payments due?
Mortgage payment dates are typically set when you finalize your mortgage. Ideally, it’s best to time your payments to your pay schedule. So, if you get paid the first and the 15th of the month, then choose a payment schedule that falls in line with these dates. That way you can take care of the payments right away. If something changes in your pay schedule, you can usually request to change the mortgage payment dates.
If you are unable to pay your mortgage, you can request a short-term mortgage payment deferral where the lender will agree to suspend your payments for a period of time. You can also ask the lender to add any missed payments to the mortgage balance to spread them out.
Should problems continue, look to extending your original repayment period, which will lower your payments.
Mortgage holders should also be aware of prepayment penalties. This is when you go over the prepayment limit allowed by your lender (assuming your lender allows this). If you want to increase your payment amount or frequency, get in touch with your lender to discuss your options.