So far in 2024, the overnight lending rate has been lowered twice by the Bank of Canada, bringing the rate to 4.5%. This is positive news for prospective homebuyers and current homeowners with variable-rate mortgages, as it offers the potential for savings on monthly mortgage payments. However, in a recent Zoocasa survey, it was revealed that the majority of respondents were waiting for significant rate cuts before entering the real estate market this year, signaling that two rate cuts are not enough to persuade prospective buyers back into the market.
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The good news is that prospective buyers don’t need to delay their homebuying plans until rates drop further; there are other ways to reduce mortgage costs. Besides the default monthly payment plan, homeowners can opt for semi-monthly, accelerated bi-weekly, or accelerated weekly payment schedules. Increasing the payment frequency can result in substantial savings on the total interest cost. So, how much can you save by adjusting your payment schedule?
To find out, Zoocasa analyzed how different payment schedules impact the timeline and interest costs for average mortgages in 15 cities across Canada. The calculations were done using the RBC (TSX:RY) mortgage payment calculator, assuming the minimum down payment and a 5-year fixed rate of 4.44%. Average home prices were sourced from the latest report from the Canadian Real Estate Association.
Choosing the Right Payment Schedule for Your Mortgage
Mortgage lenders and banks typically offer six different payment frequency options: monthly, semi-monthly, bi-weekly, weekly, accelerated bi-weekly, and accelerated weekly. The payment schedule you choose can impact the length of your mortgage term and the amount of interest you pay. Each payment schedule offers unique benefits, depending on your financial situation, and can help you pay off your mortgage faster or more gradually, potentially reducing your overall interest costs.
Monthly: This is the most common payment schedule. You’ll make 12 payments a year, once a month, resulting in the most interest paid and taking the longest amount of time of all the options. The benefit is that it offers the most predictable and manageable payment plan, aligning with regular monthly expenses and budgets, making it easier for those with consistent monthly income to plan their finances.
Semi-monthly: With a semi-monthly payment plan, you’ll make payments twice a month, resulting in 24 payments a year. This schedule will reduce your amortization period by about one month and save you a few hundred to a few thousand dollars in interest over the term of your mortgage.
Bi-weekly: Bi-weekly payments are made once every two weeks, resulting in 26 payments a year. Similar to a semi-monthly payment schedule, your amortization is reduced by a month and you can save a small amount of money in interest.
Accelerated Bi-weekly: With an accelerated bi-weekly payment schedule, you take your monthly payment, divide it by two, and make that payment every two weeks. This results in an extra monthly payment each year compared to a regular bi-weekly payment schedule. This helps to reduce the principal balance more quickly. As a result, you can significantly shorten your amortization period and save a substantial amount on interest over the life of the mortgage.
Weekly: Weekly payments are made once every week, resulting in 52 payments a year. This is a good choice for individuals who receive weekly paychecks, as it aligns with their income schedule. This payment plan can also help reduce the total interest paid over the life of the mortgage, as you are paying down the principal more frequently.
Accelerated Weekly: An accelerated weekly payment schedule involves dividing your monthly mortgage payment by four and making that payment every week, resulting in 52 payments per year. This method effectively adds an extra monthly payment annually, reducing the principal balance more quickly. In contrast, a regular weekly payment schedule simply divides the monthly payment by four without the extra payment, maintaining the same annual payment total as 12 monthly payments.
Save Up to 15% On Your Total Interest Costs By Accelerating Your Payments
Whether you want to pay off your mortgage as soon as possible or are simply looking to save money on interest, opting for a semi-monthly, accelerated bi-weekly, or accelerated weekly payment schedule can be a wise choice. For instance, a homeowner with an accelerated weekly payment schedule will pay 15.76% less in total interest costs than a homeowner with a monthly payment schedule.
For a Toronto home purchased at the average price of $1,162,167, choosing an accelerated weekly payment schedule over a monthly payment schedule can save you $95,291 in total interest paid. On a monthly payment schedule, the total interest cost amounts to $604,723, while on an accelerated weekly schedule, the total interest cost amounts to $509,432.
Even without making a drastic change from monthly to accelerated weekly payments, you can still save money. For a Vancouver home purchased at the average price of $1,351,042, the total interest cost for a homeowner with a monthly payment schedule would be $703,002. In contrast, the total interest cost for a homeowner with a semi-monthly payment schedule is $700,033. A difference of $3,000 may not sound like much, but who wouldn’t want to save it? That amount could be put toward new furniture, home improvements, or even a vacation.
Savings from accelerating your mortgage payments aren’t limited to Canada’s largest cities either. Homeowners in Calgary, Kitchener-Waterloo, and Halifax-Dartmouth can save over $50,000 in total interest costs by opting for an accelerated weekly payment plan instead of a monthly payment plan. By making more frequent payments, you reduce the principal balance faster, which lowers the amount of interest charged over the life of the loan. This strategy not only shortens your mortgage term but also builds home equity more quickly. For homeowners looking to maximize their financial benefits, increasing payment frequency is a savvy move worth considering.