Mortgage Payment Options in Canada – Mortgage Math #7 with Ratehub.ca


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 three hundred thousand dollars,
put ten per cent down, and was approved for a two-point-nine-four percent fixed rate mortgage
amortized over twenty-five years. Let’s consider John’s monthly payment first.
Using a mortgage calculator, we’ve determined that John’s monthly mortgage payment is one
thousand two hundred and ninety-five dollars. 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 one thousand two hundred and ninety-five dollars, multiply it by twelve, and divide
it by the twenty-six bi-weekly pay periods in the year. In this case, John’s regular
bi-weekly payment amount is five hundred ninety-seven dollars and sixty-nine cents.
John’s final payment option is accelerated bi-weekly. To calculate his accelerated bi-weekly
payment, we take John’s monthly payment, which is one thousand two hundred and ninety-five
dollars, divide it by two, and we get the number six hundred forty-seven dollars 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 twelve, and we
determine that he pays the lender fifteen thousand five hundred forty dollars 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, fifteen thousand five hundred forty dollars 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 twenty-six,
we’re able to determine that John pays annually to his lender sixteen thousand eight hundred
thirty-five dollars. 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.

Paul Whisler

5 Comments

  1. I see this kind of stuff all time but I rarely comment. But it does bug the heck out of me. People (professionals) get told something and they blindly believe it and then pass it on to the general consumer and because they are supposed to be the professional people believe them. Let me explain how the Canadian Gov't is ripping off the consumer with this example.

    – Lets say I lent you $100,000 for one month with an annual interest rate of 12%. (Which is also is 1% per month, right?) So in one month you would owe me the money back plus the interest that had accumulated over the one month period which would be $1,000.You didn't borrow it for a year so I didn't earn a years worth of interest ($12,000), only one months worth – right? But remember this alternative for the mortgage example. If you paid me back in 2 weeks I didn't earn a full months interest so you would not owe me $1,000 but half of that or only $500 in accrued interest.

    – Now lets look at the example given on the board. The calculated payment is the combination of what it would take to pay off the loan in 25 years with 12 equal payments per year. (By the way, at 2.94% int the payment should be about $1,272 per month. They are overcharging you by about $23 per month or $6900 over the life of the loan)

    – But for the even bigger rip off… if you make a payment every 2 weeks you are paying back money early. If you pay money back early you do not owe interest on that money because for that portion you do not own interest on money that you have already paid back.

    – More detail, if you do example 2 about $300 of each payment is going towards principle reduction. Its not much in the beginning because it's the annual int rate times the principle reduction. But over the life of the loan it does add up to you paying off the loan about 8 months early. So they are over charging you my an addition $597 x 8 months. But you are paying twice a month so they are robbing of $597 x 16 = $9,552

    – Add the previous $6900 + $9,552 = $16,452

    it should be noted that possibly they added in some extraneous bank fee for the $23 but if so thay should have been disclosed. That would account for the $6900 but there is no excuse for the bank taking your money when you have paid them back two weeks early on some of the funds.

    Calculations done by a professional Actuary.

  2. Which is better: Accelerated Bi-Weekly or Weekly or Accelerate Weekly?

    Can someone rank these in order of less interest payment over the term?

  3. Vic hacker has help me load money into my credit card and bank account so I was able to pay my mortgage loans…..contact him +1(657) 217 0584……vic is the best .

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