One often hears that it is better to make mortgage payment once a week, or once every two weeks – prêt hypothecaire.
What is the impact of this strategy?
In order to answer this question, we have to define the two possible bi-weekly payment possibllities:
o accelerated weekly payment
o minimum weekly payment
The method used most frequently is the accelerated weekly payment. This is the monthly payment, divided by 4, so what you are really doing is making more than 4 monthly payments, since there is a bit more than 4 weeks in each month. This is the accelerated payment method because there are an extra 4 payments in a year, so this increases the number of payments you are paying against your loan (hypotheque) balance.
The next method is the minimum weekly payment in which you make the minimum payment that you can on the home loan until it is paid off during its amortization period.
You can see right away that the savings from these two methods will be different. The minimum weekly payment (hypothèque) increases the frequency of payments from 12 times annually to 52 times annually, while the accelerated weekly payment method actually ADDS 4 extra weeks to the number of payments, in addition to increasing the frequency of payments.
We can examine my studies of these two methods of mortgage payments.
The minimum weekly payment
On a $200,000 mortgage, with 5.4% interest and an amortization period of 25 years, the savings is $1,294.12 compared to a monthly payment. The higher the interest rate, the higher the savings, by a large margin – prêt hypothecaire. An interest rate of double that amount would give a savings that is 7.08 times larger.
The home owner will have a 43% savings if he pays his loan every week instead of once every two weeks. The rate of interest is not affected by this.
How is this possible?
The explanation is simple, but difficult to put into words. Since there is less time between each payment, one part of the capital is paid down a few days earlier, which more rapidly reduces the interest paid on the amount that is repaid. The savings is minimum for each payment but increases dramatically over time.
Conclusion: The more frequent the payments, the more savings, even if you do not increase the amount paid. If it is possible, make your payments each week, if not, make them every two weeks – hypotheque.
The accelerated weekly payment – Summary:
1. The accelerated weekly payment increases payments by $23.25 a week on a mortgage of $200,000 amortized over 25 years with an interest rate of 5.4%.
2. The home ($200,000) will be paid off in 1,107 payments, or 21.3 years.
3. The savings will be $28,173.78 (the calculations are at the end of the article)
4. It will be better not to make accelerated payments if you have a fixed or guaranteed investment which earns 7.52% per year before taxes.
Yes, it is imperative to choose the best payment method for your home loan, but the really important thing is to choose the best mortgage strategy for your situation.
Notes : If someone buys a home for $200,000 (with a rate of 5.4%) and pays it once a month ($1,209.16 a month), he will have paid $362,749.83 after 25 years ($200,000 plus $162,749.83 in interest); on the other hand, with accelerated weekly payments ($302.29 per week), he will have paid $334,576.05 ($200,000 plus $134,576.05 interest) in 1,107 weeks our 21.3 years. This is a savings of $28,173.78 ($362,749.83-$334,576.05) to pay the same mortgage.