Benefits of biweekly payments:
Financing an Edmonton home means you will likely have mortgage payments to make. In Canada, you have 5 payment options to choose from. You can pay monthly, biweekly, biweekly accelerated, and weekly and weekly accelerated.
The most popular payment option is the biweekly accelerated as it makes the biggest impact to your mortgage balance. The accelerated biweekly mortgage payment is when you take your monthly mortgage payment and divide it by two. This amount is withdrawn from an account every two weeks. This means you will pay 26 mortgage payments in a year. This equates to one extra mortgage payment a year. This extra payment substantially shortens the lifespan of your mortgage.
Since the extra payment goes toward the principal of the loan, it’s reducing the balance quicker, thus reducing the interest charged on the life of the loan. This enables the homeowner to pay off the mortgage almost eight years early and saving roughly 23% to 30% of the total interest costs.
So many people get paid biweekly so aligning your mortgage payment to match your pay schedule just makes sense. I’m approached on prepayment privileges that banks offer however I find there are few who actually use the option to make a prepayment.
If your goal is to work towards paying down your mortgage debt, it’s easier to take small steps like biweekly accelerated mortgage payments. Let’s look at an example:
Biweekly vs monthly option
Take a $300,000 mortgage at 2.14% insured rate
Monthly payments option:
The interest for the 5-year term is $29,491.62 and the total interest costs for the life of the loan is $87,212.89
Accelerated biweekly mortgage payments:
The interest costs for the term of the loan is $28,994.20 and $77,391.81 over the life of the loan.
That’s an extra $9821.08 in savings.
Purchasing a home is the biggest investment you will ever make – an investment towards your future. With accelerated mortgage payments, you are quite literally accelerating to a future of living mortgage-free and enjoying financial freedom. Now that’s wise thinking!