Bi-weekly payment myth… it doesn’t pay your mortgage off faster.

RRSP home buyers planFor years, we’ve been told to pay our mortgage bi-weekly. Magically, it will  pay your mortgage off faster.  Hmm, let’s put that to the test.

(SPOILER ALERT!)  Around 6 yrs ago, I wrote an article showing some simple but effective math to explain this.   I’m constantly getting emails from my readers asking me what they should do..obviously, a popular topic.

Let me also say, there is merit to paying bi-weekly…I’ll explain further on.

HISTORY OF BI-WEEKLY PAYMENTS

Back in the mid 90’s, there was a huge marketing blitz by the Big Banks that promoted making bi-weekly payments instead of the traditional monthly payments.   The sales pitch was that you could save huge amounts of money and pay your mortgage off much faster….save 4 or 5 years off your amortization…. Sound familiar?   Well, BI-WEEKLY PAYMENTS DON’T REALLY SAVE YOU ANYTHING!

And I’ll prove it…. here’s the straight facts!

EXAMPLE 1.  MONTHLY VS BI-WEEKLY:

Let’s use a $200,000 mortgage with a 25 year amortization, a 4.00% interest rate and a 5 year term.

MONTHLY PAYMENTS $1,052.04.  MORTGAGE BALANCE AT END OF 5 YEARS $174,107.86.

BI-WEEKLY PAYMENTS $485.55.  MORTGAGE BALANCE AT END OF 5 YEARS $173,885.20

End result.. you reduce your balance by only $222 over a 5 year period.. Yup, that’s it!

EXAMPLE 2 ACCELERATED BI-WEEKLY PAYMENT:

Most mortgage lenders and Banks offer the option to pay an ACCELERATED PAYMENT.   This simply means you pay an extra month’s worth of payments every calender year but, it’s spread out over 12 months.  I’ll show you…

SAME MORTGAGE $200,000, 25 year amortization, 4.00% interest rate and a 5 year term.

The ACCELERATED MONTHLY PAYMENT $1,139.71.  MORTGAGE BALANCE AT END OF 5 YEARS $168,300.27.

You end up with a balance that is $5,807.59 lower at the end of 5 years…but don’t forget, you paid an extra month $5,260.20 over those 5 years..  So the net benefit is really $547.39….

Now let’s look at ACCELERATED BI-WEEKLY PAYMENTS of $526.02….the  MORTGAGE BALANCE AT END OF 5 YEARS IS $168,121.95.

The net benefit is a little better… $725.71 savings

EXAMPLE 3.. LUMP SUM PAYMENTS VS BI-WEEKLY ACCELERATED PAYMENTS.

SAME MORTGAGE $200,000, 25 year amortization, 4.00% interest rate and a 5 year term.

If we made 1 annual lump sum payment every year for 5 years, equal to 1 month’s mortgage payment ($1,052.04), your MORTGAGE BALANCE AT END OF 5 YEARS IS $168,194.51.  Compare this with the Bi-weekly accelerated payment schedule and you’ll bi-weekly is only better by $72.56.

BOTTOM LINE…. increase your payments and you’ll pay your mortgage off sooner…go with a bi-weekly ACCELERATED payment… just because it’s easier to not see it come out of your bank account in a bigger lump sum payment.

Bi-weekly and weekly payments are not a magical formula for paying your mortgage off sooner… It’s the INCREASED PAYMENT that helps you pay it off faster……

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

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