- Basic bi-weekly mortgage payments will not shorten the life of your mortgage.
- Accelerated bi-weekly mortgage payments will save you thousands in interest and shave years from your mortgage.
- Be certain that your bi-weekly payments are ‘Accelerated‘
…because I like math.
Accelerated; A $2,480.87 word!
Over the past number of years banks have come up with rather confusing payment frequency options, leaving some clients a bit disappointed 5 yrs down the road come mortgage renewal time. (for the four in ten that complete the term of their mortgage)
Rather than the an amortisation crushing ‘Accelerated bi-weekly’ plan which a quality Mortgage Broker will discuss with you, clients left to their own devices run the risk of unwittingly opting for simply ‘bi-weekly’ payments.
Here is the Math;
Let’s use a $100,000 mortgage amount (to make working out your own numbers simpler) with a 25 year amortization, a 2.74% interest rate and a 5-year term.
Monthly Payments: $460.01
Ending Balance 60 months later: $85,043.18
Now let’s calculate bi-weekly payments and the balance remaining at the end of the 5 year term.
Bi-Weekly Payments: $212.18
Ending balance 60 months later; $85,043.60
The balance is 42 cents higher. This is because you did not effectively pay anything extra over the 60 months to the lender. The sum of the annual payments is identical.
So yes, bi-weekly feels like a scam of sorts to clients who unknowingly opted for this plan.
Now lets insert the word ‘ACCELERATED’ (bi-weekly) into the equation.
Accelerated bi-weekly Payment: $230.00
Ending balance 60 months later; $82,563.13
Ah-ha, now you have a $2,480.47 lower balance (per 100K balance) at the end of the first term, and you have paid $163.87 less interest over the 5 years. Excellent!
How did this happen? When one opts for ‘accelerated’ in the above scenario the payment increases by $17.82 per payment, or $463.32 per year. For a total of $2,316.60 in additional funds going straight to the mortgages principal balance.
The big picture is improved as well, as you have effectively lowered your amortization from 25year to 22 years and 5 months.
Shaving 2.5yrs off a 25 yr mortgage might not seem that huge as it is so far off into the future, but in 22.5 yrs it will surely make you happy. Imagine having $460.00 more per month (per $100,000 of mortgage balance) to play with for 2.5 years!
If you started with a $300,000 mortgage then we are talking about $1380.02 per month X 30 which is a total of $41,400.60 of after tax money still in your pocket a little over 20 years from now.
All from one word ‘accelerated’.