Canadians love real estate. This is understandable because many Canadians see their home as a wealth-building tool. But, it can be expensive to be a homeowner. So, tactics like using an accelerated bi-weekly mortgage payment can be appealing.
Following traditional personal finance wisdom will tell you that the failsafe way to build wealth is to save a portion of your income and gradually invest it over time into an asset. Over time, the asset should earn a compound return, and you’ll experience asset value growth.
The challenge is that most Canadians could be better at following that advice. The data shows Canadians have some of the highest household debt-to-income ratios. They also have some of the lowest household savings rates among countries in the Organisation for Economic Co-operation and Development (OECD).
Canadian Mortgage Payment Trends
When it comes to personal finance, what Canadians excel at is paying their mortgages. Canada has some of the lowest mortgage delinquency rates in the developed world. Even with mortgage interest rates and nonpayment rates growing, Canada’s mortgage delinquency rate is still below 1%.
As a result of this, a large portion of Canadian household net worth is tied up in the primary residence. Canadians, by and large, are only able to follow the failsafe personal finance wisdom of “save money regularly and invest it in an asset” when:
- The savings vehicle is a mortgage and
- The asset is real estate.
So, all of this begs the question: can I get better at saving money and investing in real estate?
As fate would have it, the answer is yes.
How Can We Pay Our Mortgage Faster?
There is a way for borrowers to decrease the amount of interest paid and pay their mortgage down faster. Appropriately titled an accelerated bi-weekly payment plan, this mortgage format allows borrowers to make more payments per year than they would on a bi-weekly or monthly mortgage payment schedule – here’s why: If you pay your mortgage monthly, you make 12 payments per year.
But paying your mortgage monthly is one of many ways you can pay your mortgage.
Choose How You Want to Pay
There are several different payment schedules you can choose:
- Monthly involves one payment per month, totalling 12 annually.
- Semi-monthly entails two payments each month, totalling 24 per year.
- Bi-weekly requires payments every two weeks, calculated by dividing the monthly payment by two, resulting in 26 payments annually.
- Accelerated bi-weekly mortgage payments come every two weeks, with the monthly payment divided by two.
- Weekly payments consist of payments every week, equivalent to the monthly payment multiplied by 12 and divided by 52, resulting in 52 payments annually.
- Accelerated Weekly, similarly every week, involves dividing the monthly payment by four for a total of 52 payments per year.
If you take your annual payment and cut it in half and pay it twice per month, you would make 24 payments that are half the size of the first payment and pay the same amount of mortgage per year.
However, if you take that payment and cut it in half and pay it bi-weekly, you would make 26 payments per year since there are 52 weeks in a year, and 52 divided by two is 26.
This type of payment schedule is great for borrowers who are paid weekly or bi-weekly (every other week). More so rather than on a semi-monthly basis (twice per month, i.e., the 1st and 15th).
Consider a Closed Mortgage
Using an accelerated payment is especially valuable to individuals on mortgages with limited prepayment privileges. A prepayment privilege in a mortgage refers to the borrower’s ability to make additional payments on the principal before the scheduled due date. These prepayments can be in the form of lump sum payments or increased regular payments. They provide the borrower with the flexibility to repay the loan more quickly than the agreed-upon schedule.
When borrowers take a closed mortgage, their ability to prepay is limited or closed. An accelerated bi-weekly mortgage payment schedule is one of the tools to compensate for this lack of ability to pay off their principal faster. It can help a borrower achieve a faster paydown.
What About an Open Mortgage?
Opting for an open mortgage offers borrowers a distinct advantage in prepayment flexibility. Unlike closed mortgages, which restrict prepayment privileges, an open mortgage empowers borrowers with the freedom to make additional payments toward the principal at any time.
This flexibility allows borrowers to accelerate their payment schedule, making lump sum payments or increasing regular payments per their financial capacity. The open mortgage structure caters to individuals seeking greater control over the pace at which they repay their loan or the flexibility to sell the property or change their loan before the end of the term.
This can be particularly advantageous for borrowers who:
- Have an unclear timeline on how long they’ll own a home
- Have variable income or those anticipating windfalls
- May want to switch to a different mortgage product later
Is an Accelerated Bi-weekly Mortgage Payment Worth It?
The Canadian affinity for real estate as a wealth-building tool is well-founded, given the economic landscape. While traditional personal finance advice emphasizes saving and investing in assets, many Canadians need help following this guidance due to high household debt and low savings rates.
However, there’s hope for improvement, mainly through strategic mortgage payment plans. Accelerated payment schedules, such as bi-weekly or weekly options, can significantly reduce interest payments and expedite mortgage paydown. Additionally, choosing between closed and open mortgages provides borrowers with tailored options based on their financial goals and circumstances.
By exploring these avenues, Canadians can enhance their ability to save money and invest wisely in real estate, unlocking greater financial flexibility and control over their wealth-building journey.
