Mortgage Math: Payment Frequency [Video]

Together, with friends atThe Loop by Sympatico.ca, we decided thatthe most commonly misunderstood part of buying a home is thecalculations that go along with it. As a result, Mortgage Math wasplanned and produced for homebuyers at any stage in the buyingprocess.

Before you close on the sale of your new property, you’ll need to decide how often you want to make payments on your mortgage. In Canada, there are a variety of options available, including the popular bi-weekly and accelerated bi-weekly payment frequencies.

In our final Mortgage Math video, Mortgage Broker Christopher Molder from The Mortgage Centre – Tridac Corporation Ltd. will outline the various payment frequencies available to you. The frequency in which you choose to pay your mortgage will affect how quickly you pay off the outstanding balance, so it’s important to understand all of your options, before making a decision.

Video Transcript:

Whether purchasing for your first or third time, there are a number of decisions you’ll have to make surrounding your home purchase and corresponding mortgage. One of those decisions is the payment frequency.

In Canada, you can choose between a monthly, a bi-weekly, or an accelerated bi-weekly payment. We’ve brought in Mortgage Broker Chris Molder to walk you through each option and explain what they mean for your repayment plan.

Mortgage payment frequencies means more than how often you pay your lender. It also affects how quickly you pay down your mortgage balance.

Let’s consider John. John has recently purchased a home for $300,000, put 10 per cent down, and was approved for a 2.94% fixed rate mortgage amortized over 25 years.

Let’s consider John’s monthly payment first. Using a mortgage calculator, we’ve determined that John’s monthly mortgage payment is $1,295.

If John were to make regular bi-weekly payments, he’d be making a mortgage payment once every two weeks. Bi-weekly payments are popular because you can coincide your mortgage payment with your bi-weekly pay schedule.

To determine John’s regular bi-weekly payment amount, we take his monthly payment, which is $1,295, multiply it by 12, and divide it by the 26 bi-weekly pay periods in the year. In this case, John’s regular bi-weekly payment amount is $597.69.

John’s final payment option is accelerated bi-weekly. To calculate his accelerated bi-weekly payment, we take John’s monthly payment, which is $1,295, divide it by two, and we get the number $647 as his bi-weekly accelerated payment.

Now, even though he’s paying once every two weeks with the regular bi-weekly payment and accelerated bi-weekly payment, the accelerated bi-weekly payment amount is higher. Let’s have a look at the numbers and determine if John is able to pay off his mortgage more quickly with the accelerated option.

Now, let’s have a look at John’s annual mortgage payment to the lender under the different payment frequencies. To determine how much John pays the lender annually for monthly mortgage payments, all we do is multiply his monthly mortgage payments by 12, and we determine that he pays the lender $15,540 to the lender.

For bi-weekly payments, we do a similar calculation, except this time we multiply by twenty-six. With regular bi-weekly payments, we determine that John pays, again, $15,540 to the lender in principle and interest. This is very similar, or actually, the same, as monthly payments.

And finally, we consider accelerated bi-weekly payments. Again, multiplying by 26, we’re able to determine that John pays annually to his lender $16,835.

Now, as you can see John pays more annually under the accelerated bi-weekly payment plan. Although he’s making an extra monthly payment per year, this accelerated bi-weekly payment allows John to pay off his mortgage years sooner and save himself thousands of dollars in interest.