One of the easiest ways to cut down the amortization of a mortgage is by making bi-weekly payments. A bi-weekly payment is one where, every two weeks, your mortgage lender makes a withdrawal from your bank account for the purpose of paying your mortgage.
If you’re paid on a bi-weekly schedule, then there’s absolutely no issue with having your mortgage payment come out of your bank account the day after you’re paid. Money comes in – mortgage goes out. Easy-peasy for all concerned!
However, there are those folks who don’t get paid on a bi-weekly schedule. They might be paid monthly, with a mid-month advance. Perhaps they receive a mid-month advance and the bulk of their paycheque is paid at month end. For these people, a bi-weekly payment plan has to be structured a little bit differently so that they can still save interest on their mortgage debt by decreasing the amortization period.
1. Open a second chequing account at Simplii or Tangerine. This will become your mortgage account.
These are online bank accounts that are free.
If you are paid monthly and that you receive a mid-month advance, (or even if you’re only paid once a month), arrange to have your mortgage payment deducted from your mortgage account instead of from your current bank account.
Since there are 52 weeks in a year, the bi-weekly plan means that 26 payments are made to your mortgage every year. There will be two months in the year where the mortgage payment will be debited three times in the month. However, you will not be paid three time in that month since your employer only pays you twice a month.
You’ll need the mortgage account so that your current account isn’t debited unexpectedly, which will mess up the rest of your finances. At this point, you may be wondering how your finances might get messed up with the bi-weekly mortgage payment.
Bi-weekly mortgage payments will not always coincide with the days on which you get paid. If you decide to implement my suggestion, the mortgage account will always have a buffer of 2 (hopefully more!) mortgage payments sitting in it. So long as you automatically transfer money into your mortgage account from your mid-month advance and from the remainder of your monthly paycheque, the mortgage balance will be paid down every two weeks without fail because your lender will simply withdraw your mortgage payment from your mortgage account.
Do not use your mortgage account for anything else, except your annual property taxes and house insurance. Set up an automatic transfer from your chequing account to your mortgage account to cover the costs of taxes and insurance. This way, the money’s in place when you need it and you won’t have to touch the 2-month buffer of mortgage payments.
2. Do not use the lender’s bank account unless it’s free for life.
If you’re getting a mortgabe through a bank instead of a mortgage company, the bank will want you to use their bank products. They might even tempt you with one or two years of a free chequing account. My suggestion is to not take their offer. After the first year or two of free banking, you’ll have to go back to paying banking fees unless you’re wiling have $1500 or more held ransom for the privilege of free banking. What I call a ransom is what banks calls a “minimum monthly balance.”
I strongly suggest opening your mortgage account at one of the free online banks, Simplii or Tangerine. You don’t have to pay any bank service fees for any of their accounts, which means you don’t have to keep a minimum balance in your accounts to avoid bank fees. (I am not getting paid for this recommendation.)
And if you’re already banking with Simplii or Tangerine, then so much the better!
3. Figure out how much your mortgage payments will be.
You can figure out your anticipated mortgage payment with an online calculator. I say “anticipated” because the actual mortgage payment amount will be finalized on the day that you sign your mortgage documents.
BMO has a pretty useful calculator: https://www.bmo.com/main/personal/mortgages/calculators/payment/ (Again, I’m not receiving any compensation from BMO for recommending this calculator.)
When using this calculator, be sure to choose the option for determining the accelerated bi-weekly mortgage payment amount. This bi-weekly amount will come out of your mortgage account every 2 weeks once your mortgage is up and running. Take that bi-weekly amount and multiply it by 26, to get the annual total amount of your mortgage payment. Then divide the annual total amount by 24, since you receive your paycheque in 24 instalments over the year. This new amount, i.e. 1/24th of the annual total amount, is the amount that you should be automatically transferring to your mortgage account each time you get paid.
You can also pro-rate the transfers if it’s easier on your budget. If you receive 1/3 of your monthly pay at mid-month, the transfer 1/3 of the new amount on the 15th of the month. The remaining 2/3 of the new amount can be transferred at month-end or at the beginning of the month, whenever you get the bulk of your paycheque.
The sooner you start automatically transferring money to your mortgage account prior to taking possession of your new home, the bigger a cash cushion you’ll create.
Ideally, you start funding your mortgage account via automatic transfers from your current bank account before you even get your mortgage.
Why? It’s best to have a buffer of atleast 2 mortgage payments sitting in your mortgage account before the mortgage starts. Taking this step will allow you to adjust the rest of your budget to accommodate your mortgage payments. You’ll have had, at a minimum, 2-3 months to adjust to the impact that your mortgage payments will have on the rest of your financial goals.
4. The reason for this suggestion.
Why am I suggesting this method of payment? And why am I suggesting that you start now?
Again, it’s because your bi-weekly mortgage payments will not always coincide with the days on which you get paid. The mortgage account will always have a buffer of 2, or more, mortgage payments sitting in it. So long as you automatically transfer money into your mortgage account, the mortgage balance will be paid down every two weeks without fail.
I want you to pay the least amount of interest possible on your mortgage. To do that, you need to be paying down your mortgage every two weeks. (There’s also a weekly option but I don’t really like that one.) Every time you make a mortgage payment, you’re reducing the principal balance of your mortgage. Every dollar of principal that is paid off is a dollar on which you will never again pay interest.
Shaving years off your mortgage means less interest going to the bank because that money stays in your pocket!