When we first took out a mortgage to purchase our house a little less than a year ago, we had planned to change our payment frequency right away so that we could save some money on interest over the life of our loan.
Our interest rate is so low that we would be better off putting extra payments that we would have been able to make toward our mortgage into our RRSPs or investing it elsewhere, but at least changing the frequency would be helpful.
We didn’t change our frequency right away because we got comfortable with the monthly payment. It coincided nicely with other expenses and so monthly payments remained.
On the weekend, J and I got to talking about our financial health and lightly planning, and we decided to log on to our mortgage provider’s website and change our frequency.
We are now making accelerated bi-weekly payments toward our mortgage.
What Are Accelerated Bi-Weekly Payments?
Accelerated bi-weekly payments are payments down on the mortgage every two weeks, that cause an extra payment (or two) each year that wouldn’t have been made if you were paying a mortgage down on a regular monthly payment schedule.
If you are paid on a bi-weekly basis, you will know that there are one-two months per year that you get an “extra” paycheque in a month.
It’s not actually extra, because you still work for the money, but it will be three paycheques that land in a month instead of the typical two.
Accelerated bi-weekly payments run on a similar schedule.
How Much Money We’ll Save
By changing our mortgage payment frequency to accelerated bi-weekly payments, we will save, over the life of our mortgage, over $20,000.
That, folks, is nothing to blink at.
$20,000+ is a new car, an amazing vacation for a family of four, a good chunk of one of our children’s future college tuition, and $43,822.00 if invested at 4% for 20 years.
Hallelujah for $20,000.
How Much Time We’ll Save
Okay, so we’re not really saving time, but accelerated bi-weekly payments shaves three years off of our mortgage.
Since the maximum amortization period in Canada is 25 years, that is our amortization period too. We have had the house for 1 year, and our mortgage will be paid off in 21 years from now, meaning I will be 45 when the mortgage is paid off.
This is if we don’t pay the principle down any faster and only make accelerated bi-weekly payments.
What If We Put Extra $$ Toward the Principle?
I’m glad you asked (though I know you didn’t..)
Because our interest rate is so low right now, it makes more sense for us to invest our extra money (rental income, etc) elsewhere, however, it’s fun to do “what if” scenarios.
If we start putting $600 extra toward our mortgage principle each month (profit made from rental income), for the duration of the loan, it would look like this:
Interest Savings: $70,000
Amortization: 12 years
The interest savings is above and beyond what we save with switching to accelerated bi-weekly. So that would mean that we would save over $90,000 by doing both of these things, and we would be mortgage free when I’m 36.
If we invested that $90,000 at 4%, after 20 years we would have $197,000.
Because this is so much fun for me, if we, after we paid off our mortgage, invested our mortgage payments back in at 4%, in 20 years we would have $730,000+.
$730,000+197,000 = $927,000 – we would have this amount by the time I am 56 and ready to retire.
This is not factoring in what we are currently saving in our RRSPs, TFSAs, or my pension at work.
OK so this post went off on a bit of a different angle, but I get excited about this sort of thing.
Do you have accelerated payments? Will changing your mortgage payment frequency save you money?
We don’t do accelerated payments as both my husband and I are paid twice a month, not bi-weekly. While this kind of stinks in that we never get the three paycheck months, it is easier for us to budget. Our mortgage rate is 3.375% fixed so we’re not paying any extra to our mortgage either. It makes way more sense to invest it like you.
Those scenarios are always fun to work out!
We paid off our mortgage very quickly, because the return was very good compared to other options at the time. The only thing I would say about your analysis is to make sure that the money you would redirect to the mortgage is in fact being saved elsewhere, for a higher rate. The neat thing about the mortgage is the return is “guaranteed” in a way and there’s lots of pretty calculators to show you the impact. However, if you’re diverting the money to pay down the mortgage from somewhere else that’s earning more, it’s not worthwhile. I would recommend finding out if prepaying on your mortgage allows you to reduce your payments below what they started out as. That can be very useful, should you ever need to free up cash flow in a hurry.
I’m curious to know if this may also help your month to month cashflow – in terms of not having to make sure you have a large chunk of cash in your account at the beginning of each month and spread it out across two payments now. I have three mortgages (two rentals and a primary) and I always worry that I have enough cash in our checking account for the first of the month because it’s a pretty good chunk to hit at once. Maybe breaking it up into bi-monthly payments would help that out (though I seem to have all our credit card balances due mid-month).
In any case, such a simple change really is amazing how much it saves. I remember reading once that for people int he US who hold 30-year mortgages, it can often make more sense to just due bi-monthly (and additional?) payments rather than refinance to a 15 year mortgage.
Good going, it’s always amazing to see how paying a little extra can save you thousands over the life of the mortgage. We pay accelerated weekly, with extra payments on top.
Great idea! After I closed on my house I received offers to do the twice-a-month payments but couldn’t do it with my current budget. But I do use those 2 extra pay checks for extra mortgage payments!
Thanks for inspiring me!
We have done the same thing here in the States. We bought a house 14 months ago and “swore” we would start the bi-weekly payments. We haven’t.
So, right now, after commenting, I’m going to my lender website and starting this. No more procrastinating.
Thanks!!!
The Warrior
NetWorthWarrior.com
Just wanted to stop by and update you guys.
I did it. I took your advice and now will be saving $19k+ with a 15 min call to set up bi-weekly mortgage payments.
Here’s the post:
Thanks for the kick in the tail
The Warrior
NetWorthWarrior.com
Awesome! I’m so glad you set it up. That’s an awesome wad of cash.
I’ve been in my condo for about 32 months now. At 24 months I started paying extra towards principle, about the same amount as the PI in PITI. I stopped last month because I wanted to redirect the extra funds elsewhere, but those 8 months of extra payments cut TWENTY-EIGHT months off the duration of the loan and will save me $5000 in interest. Just eight months! If my income goes up in the future I’ll start paying extra again.
Wow – 28 months is a HUGE chunk of time and think of all that $5K of interest will buy you! That’s impressive, Sara. Thanks for sharing!