Money Management Newsletter: Home
Pay your mortgage off faster and save thousands
One way of saving thousands of dollars on
your mortgage is by switching your payments from monthly to weekly or
bi-weekly using a rapid amortization calculation.
Weekly or bi-weekly mortgage payments have been growing
in favour with home owners across Canada and many institutions now offer
these payment options. The fascination with more frequent payment options
is that if they are done correctly you can take several years off your
mortgage amortization and thus own your home free and clear years ahead
of paying on a monthly basis.
Why is this? The trick is in how the weekly or bi-weekly
payment is calculated. To achieve the rapid amortization you would take
the monthly payment amount and divide it by four (weekly payment)or by
two (bi-weekly payment). By doing this you end up reducing your mortgage
principal each year by the amount of the monthly payment.
A simple illustration will help explain. If for
example your monthly mortgage payment was $400.00 you would make a total
yearly payment of $4,800.00 (400 X 12 months). By dividing the $400.00
by 4 you would have a weekly payment of $100.00 and thus pay a total yearly
amount of $5,200.00 (100 x 52 weeks). Similarly by dividing the $400.00
by 2 you would have a bi-weekly payment of $200.00 and again pay a total
yearly amount of $5,200.00 (200 x 26 bi-weekly pay periods). You can see
from this example that both alternate payment methods result in an additional
$400.00 ($5,200 - $4,800) being applied to your mortgage each year which
comes directly off the principal. These accelerated payments can reduce
a 25 year mortgage amortization down to 21 years. That's four years of
mortgage payments saved. Since you pay your mortgage with "after tax"
dollars, think of what you would have to earn before taxes to see the
true impact of the savings.
Weekly and bi-weekly mortgage payments are thus another form of forced
saving and these options are certainly attractive for those whose employment
pay periods fall the same way. However, not all weekly mortgage payments
are calculated using the rapid amortization process noted above so you
may have to confirm this with your mortgage company.
We have included a chart below that compares the differences
between a regular monthly mortgage payment, regular weekly or bi-weekly
payment and rapid weekly or bi-weekly payment. You can also make use of
Amortization Scheduler on our web site to play with various scenarios.
Another way to reduce your amortization and save money
is by making lump sum payments towards your mortgage when they are permitted.
These could be by way of a "double up" feature allowed on your regular
payments at certain times of the year , mortgage payment increases, or
lump sum reductions on the anniversary date or other permitted dates based
on a percentage of your original mortgage amount. Whatever method you
choose will have the effect of reducing your mortgage amortization and
potentially saving yourself thousands of dollars.
One other way to manage mortgage debt is to utilize
a product such as Manulife Bank's "Manulife One" account which combines
your mortgage debt and regular chequing account as one product. This way
every deposit you make to the account immediately reduces the debt while
every withdrawal of course increases it. The idea is that by depositing
your whole pay to this account you will receive the immediate benefit
of reducing more of your mortgage interest expense than if you just paid
the regular mortgage payment. This is a better option on an after tax
basis than leaving some of your pay in a low interest savings account
where anything it earns is taxable. You must however be comfortable seeing
the large negative balance on your bank statement each month with the
risk that you may never pay the mortgage down if you succumb to the temptation
of continuously drawing up to the maximum of the credit line. If you currently
max out your credit cards and any existing line of credit this may not
be the mortgage product for you. We hope to do a review of this type of
mortgage account before the end of this year.
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© , Fiscal Agents Money Management Newsletter
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