Thursday, July 3, 2014

What if bi-weekly payments don't fit with your lifestyle?

Have you heard? 68% of people in their twenties, who responded to a survey conducted by Manulife, don't consider mortgages to be debt.  Folks, no matter which way you slice it, when you borrow money, and have to pay it back, it's debt. There is good debt (appreciating assets) and bad debt (depreciating assets like cars) but either way your debt must be repaid and there is an interest cost, and an opportunity cost, to getting in debt.

With Canada's household debt near all time highs, this is probably a good time to talk about ways to pay that mortgage debt down as quickly as possible.

I'm sure you've heard it before from your parents or your friends; pay your mortgage bi-weekly, instead of monthly and you'll pay your mortgage off faster. This is true. Why? Because in two months out of the year you will make three mortgage payments; which works out to one extra monthly mortgage payment a year being made on the balance outstanding of your mortgage.

When I explain this to some of my clients they get excited, realizing this simple step will help them to pay off their mortgage faster, and cost them less interest overall. But, for some clients, bi-weekly payments just don't work. Examples include individuals that are paid on the 15th and 30th every month or self employed individuals that would find it difficult to budget for a mortgage payment every two weeks.

I am one of those people. I don't want a mortgage payment every two weeks. I am busy and have enough on my plate and I don't want to make three mortgage payments in two months of the year, because those months will just plain suck. So, is there an alternative? Yes!

If you take your monthly payment and divide it by 12, and then increase your monthly mortgage payment by this amount every month, the effect will be the same as paying your mortgage with bi-weekly accelerated payments.

Here's an example:

$250,000 mortgage @ 2.99% over a 5 year term
Monthly mortgage payment:
$1,181.83
Balance at the end of the term:
$213,645.52
Bi-weekly accelerated payment:
$590.92
Balance at the end of the term:
$207,227.55
Monthly payment with an increase of $100/month (approximately one monthly mortgage payment divided by 12)
$1,281.83
Balance at the end of the term:
$207,185.45





As you can see from the example above, there are alternatives to paying your mortgage bi-weekly and still paying it off quicker. Mortgage Brokers know what's up and can help to give you creative ideas on how to reach your financial goals. If you would like more information on this concept feel free to get in touch!


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