The average Canadian has to take out a mortgage in order to buy a house. Once the process is completed and you own your home, you will have to start making payments on your mortgage.
During the process, you will decide, with the help of your lender, which payment option to choose. The option you choose will determine how often and for how long you will pay. There are 5 different payment options: monthly, weekly, biweekly, accelerated biweekly or accelerated weekly.
Each option will affect your budget one way or another. As you continue reading, you will know all the information you need to choose the ideal form of payment for your financial situation.
Monthly payments are the most direct and most of the time the most common. By choosing to make monthly payments, your mortgage payments will automatically be taken from your bank account under the same name each month. This means that you will make 12 equal payments on your mortgage per year.
If you choose to make weekly payments, the money will be withdrawn from your account each week. 52 weeks a year. Monthly payments are calculated by dividing by 52 your annual mortgage payment. If this is $ 15,000, your weekly payments will be approximately $ 288.
Biweekly payments indicate that you will make payments every 2 weeks. These are calculated by dividing your annual mortgage payment by 26. There are 26 periods of 2 weeks per year. If your annual payment is $ 15,000, your bi-weekly payments will be approximately $ 567.
Bi-weekly accelerated payments
Accelerated payments will allow you to pay off your mortgage faster and save on interest. Accelerated bi-weekly payments might look like regular bi-weekly payments, but they are not. Here is how they work:
You will pay off your monthly mortgage every 2 weeks. With an annual mortgage of $ 15,000, your monthly payments will be $ 1,250. You will make payments of $ 625 every 2 weeks, which adds up to $ 16,250 after one year instead of $ 15,000 ($ 625 X 26 = $ 16,250). By choosing this option, you will repay $ 1,250 more on your mortgage annually.
Accelerated weekly payments
The calculation of accelerated weekly payments is very similar to that of accelerated bi-weekly payments. Your monthly mortgage payment of $ 1,250 is here divided into 4 and then multiplied by 52, which means that you will repay $ 16,250 on your mortgage annually. The only difference is that you will make weekly payments rather than biweekly.
What is the benefit of paying off your mortgage with accelerated payments?
You might not have the finances to make accelerated mortgage payments, but if it’s financially possible for you, you’ll benefit.
- Shorter amortization period You can repay your mortgage faster than the average.
- You will create real estate equity more quickly. Real Estate Equity is the part of your home that you own after you start paying off your mortgage. The sooner you repay your mortgage, the sooner you will have equity.
- Save on interest. This is probably the main reason for choosing to make accelerated payments. The faster you pay off your mortgage and the less interest you will have to add, leaving you more of your income for what really matters.
Mortgage payment options: which one is the best?
The most efficient and cost effective way is either with accelerated bi-weekly payments or accelerated weekly payments. If you choose one of these options, not only will you pay off your mortgage faster, but you’ll also save a few thousand dollars in interest.
You must know what lifestyle you want to maintain when paying your mortgage and your cash flow. If you think that accelerated payments would be too heavy for your budget, maybe this is not the ideal option for you.
Need a second opinion?
If you are thinking of buying a home or just need more information about mortgage options and solutions, do not hesitate to contact us!