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Understanding Accelerated Payments

accelerated paymentsAn increasingly popular way Canadians choose to pay off mortgages before their amortization period expires is by making accelerated payments. Owning a home and paying off a mortgage takes the average Canadian household between 20-25 years.  However, a salary raise, job promotion, being prudent spenders, or an inheritance can help interested couples use their newfound capital to shorten that time.

Accelerated Payments: Briefly Defined

The majority of Canadian homeowners opt for making monthly mortgage payments because that is what financial institutions traditionally offer. Accelerated payments offer homeowners an alternative from this predictability by factoring one additional monthly mortgage payment each year.  This means that instead of making 12 payments a year (once a month), you’re making 26 payments (exactly every two weeks). If you choose to make accelerated weekly payments then you’ll make 52 payments a year.  

How can an accelerated payment schedule help me financially?

When you make accelerated payments on a biweekly (or weekly) basis, you shave off an average of 4-5 years and several thousands of dollars in interest from your amortization period and mortgage respectively. Any savings you secure and avoid spending towards mortgage is extra money in your pocket. You can add this capital towards your children’s education or your retirement savings, in an investment portfolio, securing a second property or making renovations.

What’s the difference between an accelerated bi-weekly payment and a semi-monthly payment?

That’s a good question.  While they might sound the same, they’re actually quite different! Let’s briefly review the differences. When you make accelerated bi-weekly payments, your payments are due exactly every two weeks, regardless of how many days are in a month. This comes to 26 payments a year By contrast, semi-monthly payments are made twice a month, typically on the first and fifteenth days of each month.  You’ll make 24 payments a year under this schedule.

Can you show me what paying off a mortgage looks like in each scenario?

Certainly! We’ll outline how you’d pay off a $650.500 fixed-rate mortgage at 2.5% on a monthly, weekly, semi-monthly, accelerated weekly and bi-weekly basis.

Payment Amount Amortization Period (Years) Interest on Amortization
Monthly $2,910.78 25 years $222,735
Weekly $671.19 25 years $222,040
Semi-Monthly $1,454.64* 25 years $222,284
Accelerated Bi-Weekly $1,455.39 22 years and 6 months $197,316
Accelerated Weekly $727.70 22 years and 5 months $197,045

* This amount is the monthly mortgage divided by two, one payment made on the first, the second on the fifteenth of each month. As you can see, choosing an accelerated weekly or accelerated bi-weekly payment plan decreases both payable interest and the amortization period.

Okay, okay – I’m sold! So, how can I talk to my financial advisor or lending institution to give me an accelerated mortgage?

The approval process for an accelerated mortgage is nearly the same as qualifying for a default monthly plan. However, your lender may recommend or even require that you meet a certain income threshold before approving you for one. This is because accelerated payments take a lot of discipline and above-average financial strength than the typical monthly mortgage.

I can’t afford to make accelerated payments anymore. Got any advice?

Yes. Firstly, don’t panic. The bank won’t auto-repossess your home. Contact your financial institution and inform them of your situation. While you get your finances in order, continue making your payments until your bank approves your payment schedule changes. Most, if not all, banks and credit unions within Canada allow you to change your mortgage payment frequency at any time.  For further help or information, feel free to contact us at Mortgages.ca. We are always available to help!