Payment Options and Features

The length of time to pay down a mortgage depends on the payments structure and whether the borrower takes advantage of a variety of extra features offered by the lender.  A borrower  needs to be familiar with the different payment options and schedules available.  For the majority of Canadians, paying down a mortgage as quickly as possible should be the primary goal.

For illustrative purposes, we will assume a standard monthly mortgage payment of $1,000 per month, in the monthly, semi-monthly, bi-weekly, accelerated bi-weekly and weekly payment sections found below. .

Monthly

The frequency of mortgage payments will play a significant factor in determining the length of time an individual will take to pay down a mortgage.  Standard mortgage amortization periods of 25 years would require an individual to make monthly mortgage payments for an equivalent time period.  Individuals would make 12 monthly $1,000 mortgage payments per year and therefore be required to make 274 mortgage payments over the 25 year amortized period.

Semi-Monthly

Borrowers selecting the semi-monthly payment option would be making double the number of payments when compared to monthly mortgage payments.  These payments would represent half of the set monthly mortgage dollar amount paid; the benefit to borrowers is that the lender would receive a portion of the mortgage payment (half), at an earlier point in comparison to monthly mortgage payments.  Individuals would be required to make 24 semi-monthly payments, and the total interest paid to the lender would be slightly lower than with traditional monthly mortgage payments.

Individuals would make 24 semi-monthly (twice monthly) $500 mortgage payments over a one year period. 

Bi-Weekly

Borrowers selecting the bi-weekly payment option would be making mortgage payments every two weeks.  If the monthly mortgage payment amount is $1,000 a month, representing total yearly payments of $12,000, individuals selecting bi-weekly mortgage payments would make 26 payments of $462 dollars ($12,000 divided by 26 equal payments). The difference in savings between semi-monthly and bi-weekly payment is not significant.

Bi-Weekly Accelerated

Bi-weekly accelerated or accelerated bi-weekly payments are often confused with standard bi-weekly payments.

Borrowers selecting the accelerated bi-weekly payment option would be making mortgage payments every two weeks, instead of twice per month.  If the monthly mortgage payment amount is $1,000 a month, representing total yearly payments of $12,000, individuals selecting accelerated bi-weekly mortgage payments would make 26 payments of $500 dollars ($1,000 monthly divided in half).

The difference in savings between semi-monthly or bi-weekly, in comparison to accelerated bi-weekly is significant as a result of an increased dollar amount being paid towards the mortgage. 

Weekly

Borrowers selecting the weekly payment option would be making mortgage payments every week over 52 weeks.  If the monthly mortgage payment amount is $1,000 a month, representing total yearly payments of $12,000, individuals selecting weekly mortgage payments would make 52 payments of $231 dollars ($12,000 yearly divided by 52 weeks).

The difference in savings between monthly and weekly is not significant, especially in periods of low interest rates. 

Weekly mortgage payments should not be confused with accelerated weekly mortgage payments.

Weekly Accelerated

Weekly accelerated mortgage payments or accelerated weekly mortgage payments are often confused with standard weekly mortgage payments.

Borrowers selecting the accelerated weekly payment option would be making mortgage payments every week, just as they would be with weekly mortgage payments.  However, if the monthly mortgage payment amount was $1,000 a month, representing total yearly payments of $12,000, individuals selecting accelerated weekly mortgage payments would make 52 payments of $250 dollars ($1,000 monthly divided by four). The difference in savings between monthly and accelerated weekly is significant as a result of an increased dollar amount being paid towards the mortgage.  The difference between accelerated weekly and accelerated bi-weekly is nothing significant in most cases.

Interest Only

Interest only payments in the majority of cases on mortgages are only on secured lines of credit commonly known as Home Equity Lines of Credit (HELOCs).  Individuals selecting interest only mortgage payments will never pay down the principal amount on the mortgage.  In many cases, borrowers use interest only payment options when they are in a financial bind for one reason or another.  Generally speaking, it is not a wise strategy to simply make ongoing interest payments on loans.

Double Up Payments

There are many types of mortgage prepayment options available from a variety of lenders and financial institutions.  Borrowers may be able to select from lump sum payments, increased payments and double up payments, with complete details explained in the mortgage agreement. 

With double up mortgage payments, in most cases found on any regular mortgage payment date, individuals can double up their mortgage payment.  The amount of the double up extra payment is applied directly to the principal amount of the mortgage.  Note that the double up payment is non-cumulative and thereby individuals who do not take advantage of this double up feature in one month, are not able to carry the amount forward at a future date. 

Borrowers taking advantage of extra payments such as double up payments can reduce the amount of time needed to pay down a mortgage. 

Mortgage Payment Increases

Many lenders let borrowers increase their payments on their mortgage.  These increases are allowed on mortgages with monthly, semi-monthly, bi-weekly or accelerated bi-weekly and weekly and accelerated weekly mortgage payments.  In many cases, the amount of the increased payment cannot exceed 10% or 15% of the original mortgage payment. 

Borrowers that take advantage of increased mortgages payments can reduce the amount of time needed to pay down a mortgage. 

Features such as double up payments, extra payments and lump sum payments are clearly explained in a mortgage agreement. 

Lump Sum Payments

Many lenders allow borrowers to make extra lump sum payments towards their mortgage.  In many cases, the amount of the lump sum payment cannot exceed 10% or 15% of the original balance.  Some lenders take into consideration the “double up” payments received in the allowed lump sum calculation on a yearly basis.  In many cases, lenders will require minimum lump sum prepayment amount.  Lump sum mortgage payments are applied directly to the principal on the outstanding mortgage. 

Borrowers taking advantage of extra payments such as lump payments can reduce the amount of time needed to pay down a mortgage. 

Features such as double up payments, extra payments and lump sum payments are clearly explained in a mortgage agreement. 

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April 27, 2017

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