Will I pay off my mortgage quicker if I change my payment frequency to Bi-weekly from Monthly?
If you change your payment frequency from monthly to bi-weekly you are paying 26 payments per year vs. 12.
Let’s look at this a bit closer:
- Assuming a monthly payment of 1,000 your total annual mortgage payments paid in a year is 12,000.
- Assuming you change your monthly payment of 1,000 to bi-weekly payments the following calculation would be used to determine your bi-weekly payment. 1,000 x 12 = 12,000 divided by 26 = 461.54.
- In the above instance you would have paid the same amount of total payments to your mortgage whether you paid them monthly or bi-weekly.
- Monthly payments – 1,000 x 12 = 12,000
- Bi-weekly payments – 461.54 x 26 = 12,000
So by changing your payments from monthly to bi-weekly it does not make a difference. I tell my customers that the main reason to change your payment frequency in most cases is to accommodate when you receive your pay cheques.
If a homeowner truly would like to pay off their mortgage quicker then they will choose to “accelerate” their mortgage payments, which means they will increase their monthly payment or bi-weekly payment resulting in a more rapid pace of paying off their mortgage. Almost every lender will allow you to this. In addition, they will allow you to increase your mortgage payments annually.
Let’s look at an example of how “accelerated bi-weekly payments” can decrease your overall amortization and help you be mortgage free sooner!
Based on a mortgage of $500,000 amortized over 25 years at a 5 Year Fixed rate of 2.59% your “bi-weekly payments” would be $1,043.54. After 5 years your outstanding balance would be $466,115.
If you decided to amend your payments to “accelerated” bi-weekly at the beginning of your term, then your payments would be $1,131.50 (this payment is calculated by dividing your monthly payment in half). The result of making accelerated bi-weekly payments would decrease your amortization by 2 years 7 months and would also leave you with an amount owing at the end of your 5 year term of $460,702 which would be $5,413 less.
Other advantages of paying down your mortgage quicker are:
- paying less interest
- decreasing your mortgage balance so you have more equity to work when you decide to sell and purchase again
- being able to access equity your increased equity for the years if needed
- a forced savings tool
If you decide to accelerate/increase your payments and you feel you would like to amend them back to regular bi-weekly payments, most lenders will allow you to do this without any concerns.