Mortgage Payment Frequencies

This is the 10th article in our Mortgage Life Cycle Costs series.

Why write these Mortgage Life Cycle Costs articles?  We have seen many people suffer loss, because of an over-focus on interest rates.  It is our belief that you can make better mortgage choices when you know and understand critical information about mortgages.  As a reminder, Canada’s large banks are a saturated oligopoly.  Oligopolists are interdependent of each other and usually don’t risk competing by price [interest rates], instead they compete by image, retention, etc.  Consequently, in our Mortgage Life Cycle Costs series, we caution you that an over-focus on interest rates [price] may blind you to other important mortgage factors that can cost you a lot more than the difference between two mortgage interest rates.

In this article we will cover mortgage payment frequencies.  You may be wondering why spend an entire article on a seemingly trivial topic such as mortgage payment frequencies?  Precisely because of an over-emphasis on interest rates we often neglect other mortgage characteristics such as the payment frequency.  How often we make mortgage payments is either treated as an afterthought or overemphasized because of a believe that more payments will pay the mortgage off quicker.  Hopefully with the help of the information in this article you will be able to plan your mortgage better, choose a convenient payment frequency and pay your mortgage off quicker.

Let’s explore your mortgage’s payment frequency options.

ABOUT PAYMENT FREQUENCY

Before we continue let’s first define payment frequency.  All things being equal and simply put, your payment frequency determines how often you make mortgage payments. E.g. monthly, semi-monthly, bi-weekly, etc.

Lenders usually consider monthly payments to be the standard and other payment frequencies to be mortgage privileges.  Consequently, lenders may require a borrower’s mortgage payments to revert back to monthly payments if it deems the borrower is not managing his/her payments according to the mortgage’s terms & conditions.  E.g. a borrower has a poor bi-weekly payment history.

While there may be others, here are the most common Canadian mortgage payment frequencies, their corresponding number of annual payments and how they are calculated:

Remarks and notes for Table One:

  1. Manual Calculation Steps: To manually calculate non-monthly payment frequencies, follow these steps as illustrated in Table One:
    • Step 1: Calculate the monthly mortgage payment using a mortgage calculator.
    • Step 2: Annualize the monthly mortgage payment:
      • Non-accelerated Payments: Monthly mortgage payment x 12
      • Accelerated Payments: Monthly mortgage payment x 13. Add one additional, monthly mortgage payment to the annualized mortgage payment for a total of 13 payments per year.
    • Step 3: Divide the annualized mortgage payments by the number of payments per year associated with the payment frequency. g. For bi-weekly and accelerated Bi-weekly payments: Annualized payments/26
  2. The “Why”: If mortgage calculators can automatically calculate the above frequency payments, why create Table One? The content in Table One shows you how to manually calculate various frequency payments so that you can understand their effects on your mortgage, and you can effectively choose your most desired mortgage payment frequency.
  3. Payment Frequency Results [Neglecting acceleration]: Does paying your mortgage more times than monthly pay off your mortgage quicker? All things being equal, semi-monthly, bi-weekly or weekly payments may save you a little bit of interest, but making minimum, mandatory payments more than 12 times per year don’t pay your mortgage off quicker.
  4. What are “Accelerated” Payments: Let’s take the myth out of “accelerated” payments. Because lenders treat accelerated payments separate to normal payment privileges, accelerated payments have almost taken on mythical proportions.  To put it simply, accelerated payments is an automated way of increasing your regular, minimum mandatory payments.  As you will see from the following examples, “accelerated” simply means a 13th monthly mortgage payment is added to your annual mortgage payments and divided over the number of payments per year as defined by your payment frequency.  g. For accelerated bi-weekly payments the 13th monthly payment is divided by 26 and added to each bi-weekly payment.  Some lenders may call their accelerated payments by a different name, e.g. “Rapid” bi-weekly, but these are usually just different names with the same effect as accelerated payments.
  5. The Accelerated Effect: Accelerated payments reduce a mortgage’s balance faster than regular, minimum, mandatory payments, but as we discussed above, the above normal reduction in balance is primarily due to the annual, additional, 13th monthly mortgage payment being added to and spread over the minimum, mandatory payments and not due to the payment frequency itself.
  6. Other Accelerated Payments: Accelerated payment options are usually limited to bi-weekly or weekly payments. However, once you understand what “accelerated” means and how accelerated payments are calculated it is easy to calculate other accelerated frequency payments even though lenders don’t offer them. E.g. Accelerated Monthly Payments = [Monthly payments x 13]/12.
  7. Payment Alignment: Although not all, most lenders typically offer the payment frequencies listed in Table One and they allow their clients to adjust their mortgage payment dates to match their salary payment dates.

QUESTIONS & ANSWERS

Let’s review a few common questions, pros & cons, etc. related to mortgage payment frequencies:

  1. Pros – Non-Monthly Payments:
    • Payment Alignment: Most people are paid bi-weekly, weekly or semi-monthly and not monthly. While monthly payments are always available, being able to align your mortgage payment with your salary to make mortgage payments easier is a great benefit.
    • Interest Savings: Although nearly insignificant, and subject to the mortgage’s compounding period, non-monthly payments can save you some mortgage interest.
    • Flexibility: Most lenders will allow borrowers to change their payment frequency during the mortgage term.
  2. Cons – Non-Monthly Payments:
    • A Mortgage Privilege: Non-monthly payment frequencies are usually deemed a mortgage privilege, so they are subject to lender approval and/or change.
    • More Transactions: Non-monthly payments mean more than 12 mortgage payments per year and more times that you need to ensure that your bank account balance is sufficient for the next mortgage payment.
  3. Pros – Accelerated Payments:
    • Mortgage Free Faster: The accelerated, and hence additional annual mortgage payment cause your mortgage to be paid down faster and can reduce your mortgage amortization by almost 2 years or more.
    • Automated: Accelerated payments are a great way to “set-and-forget” your mortgage free plans.
    • Pre-Payment Privileges: While some lenders consider accelerated payments to be part of your prepayment privileges, other lenders consider pre-payment privileges as additional to accelerated payments if the accelerated payments are setup on the closing date.
  4. Cons – Accelerated Payments:
    • Limited to Some Payment Frequencies: As mentioned before, accelerated payments are usually limited to bi-weekly or weekly payments and not monthly or semi-monthly payments.
    • Not Customizable: Accelerated payments are usually limited to no more or less than one additional, monthly payment being added to the annual mortgage payments as discussed before. While smaller or larger contributions could be eligible under the mortgage’s prepayment privileges, they are ineligible as accelerated payments.
  5. Accelerated Monthly or Semi-Monthly Payments: As previously mentioned, lenders usually offer only bi-weekly or weekly accelerated payment frequencies. However, “accelerated” monthly and semi-monthly payments are very easy to calculate and even though your lender may not call them “accelerated” payments, you should be able to setup equivalent accelerated payments using your mortgage’s prepayment privileges if your mortgage allows it.  Below are monthly and semi-monthly equivalent accelerated payment calculations and examples:
    • Monthly: [Monthly Payment x 13]/12 | E.g. $1,000/m. The equivalent accelerated monthly payment = [$1,000 x13]/12 = $1,083.33/m
    • Semi-Monthly: [Monthly Payment x 13]/24 | E.g. $1,000/m, which is $500 semi-monthly. The equivalent accelerated semi-monthly payment = [$1,000 x 13]/24 = $541.67
  6. How to Choose a Mortgage Payment Frequency and Payment:
    • Convenience: Since we have already established that the payment frequency per se usually does not pay your mortgage off faster, most borrowers who choose non-monthly payments do so to align their mortgage payments with their salary payments.
    • Cashflow: If you are concerned about cashflow and don’t want to check your bank account more than once a month for sufficient funds, then monthly payments may be more suitable to you.
    • Accelerated Payments: If you want to expedite your mortgage free journey in a set-and-forget way, accelerated bi-weekly or weekly payments could be your preferred choice. Remember, if you don’t want to start your mortgage with accelerated payments immediately, a good mortgage should allow you to change to accelerated payments later during the mortgage term.

As you can see how you pay your mortgage can make a difference to your financial future, but even your mortgage’s payment frequency depends on you having a suitable mortgage.  Let us help you with such a mortgage.

Disclaimers:

  • The opinions expressed in this article are the opinions of the author only and not of anyone or any other entity.
  • Not legal, economic, financial or any other advice.
  • Not for decision-making purposes.
  • Subject to eligibility, lender approval and terms & conditions
  • In any and all cases of any conflict of any kind about anything whatsoever, lender rules, guidelines, terms & conditions, interest rates, etc., supersede the presented information.
  • Subject to change in any or all ways, at any time, without prior notification or warning.
  • Does not include all, may exclude some and/or may only partially represent guidelines, mortgage rules, scenarios, topics, etc.
  • These are general guidelines and are not specific to any particular mortgage lender or mortgage related product. Lenders don’t all have the same products, underwriting guidelines, etc.
  • Subject to all borrowers seeking independent professional advice from any and all providers as determined solely by the borrower, at the borrower’s own and sole discretion, prior to applying for or making changes to a mortgage/loan.
  • &O.E.