Despite promotion, and common belief, making bi-weekly mortgage payments will not save a lot of money on your mortgage, as compared to traditional monthly payments, according to a study published by Canada Mortgage News. The only sure way to cut mortgage cost is to pay a bit more money every year with accelerated payments.
The sales pitch is that you could save huge amounts of money and pay your mortgage off much faster with bi-weekly payments.
But the CMN notes that the reality is less enticing.
For example, they refer to a $200,000 mortgage with a 25-year amortization, a 4 per cent interest rate and a five-year term. With monthly payments, the cost would be $1052.04 and the balance at the end of five years would be $174,107.86.
Now let's calculate bi-weekly payments and the balance remaining at the end of the five-year term. The bi-weekly payments would be $485.55 and the mortgage balance at the end of five years would be $173,885.20.
So, as the homeowner, you end up reducing your balance by only $222.66 over a five-year period. Not much of a benefit, and you really aren't paying your mortgage off sooner, the CMN study states.
A better strategy could be an accelerated payment, which usually means to make one extra month's worth of payments every year, but spread it out over 12 months.
Using the same mortgage of $200,000, 25-year amortization, 4 per cent interest rate and a 5 year term, the accelerated monthly payment is $1,139.71, and the mortgage balance after five years is $168,300.27.
You end up with a balance that is $5,807.59 lower at the end of five years - but don't forget, you paid an extra month's worth of payments every year during those five years, totaling $5,260.20. So the net benefit is really $547.39.
Then the study looks at accelerated bi-weekly payments of $526.02. In this case, the mortgage balance after five years is $168,121.95. The net benefit is a little better, at $725.71.
The bottom line, the study notes, is that if a homeowner increases the amount of payments he or she will pay the mortgage off sooner. You may not derive as much of a benefit as you may think but it's better to pay more towards your mortgage in most cases: after all, the best mortgage is no mortgage, the study concludes.
