The term bi-weekly often causes confusion when it comes to mortgage or loan payments.
However, it’s quite simple.
If you pay bi-weekly payments, you make one payment every two weeks.
That’s 26 payments annually.
Understanding Mortgage or Loan Payment Frequencies
Payment frequency can influence how much interest you pay when you borrow which directly influences your overall cost.
How often you make payments can also affect how quickly you pay off your debt.
However, lenders may not make it easy for you to decipher your options.
They’re focused on the business of lending, not what’s best for you, your lifestyle, and your goals.
Luckily, this article will help you make an informed decision as we explore the pros and cons of the most common payment frequencies offered by Canadian lenders.
1. Weekly Payments
Making a smaller payment every week can be convenient if you’re paid weekly.
You can divide your mortgage or loan payment between four periods over the course of a month, which improves cash flow.
Weekly payments will also save you a tiny amount of interest since you’re reducing your principal outstanding quicker.
Very few people receive a paycheque every week, making this method inconvenient.
The risk of bouncing a payment increases quite a bit, which is something you never want to happen.
2. Biweekly Payments
This can be a convenient option if you receive a paycheque every two weeks.
It’s easy to pay a portion from each cheque, which improves cash flow.
However, the greatest benefits of a bi-weekly payment plan is that you pay off your mortgage or loan quicker and save on interest, since you’re paying 26 payments annually (52 weeks/2).
With only 12 months in each year, you’re paying an extra month of payments on your mortgage annually.
Paying an extra month on your mortgage may not be an expense you can afford.
You may also have better uses for that money.
3. Semimonthly Payments
You pay semi-monthly payments twice a month, usually half on the 1st and the other half on the 15th.
This can be convenient when this payment scheme aligns with your pay periods.
Interest still accumulates on the balance you haven’t paid.
As a result, this payment frequency offers little or no overall savings.
4. Monthly Payments
This is the most popular way to repay a mortgage or loan.
Payments often fall on the 1st of every month, making it easy to remember.
Your lender may allow you to switch this date for convenience too.
Since you’re only paying once a month, more interest accrues between payments.
You also pay more interest over the life of your mortgage or loan.
Examples of Different Payment Frequencies
All this is well and good, but it doesn’t give you a realistic overview of the impact of payment frequency on your mortgage.
Whether one method leads to less interest or shortens your mortgage, it doesn’t tell you by how much.
For demonstration purposes, we’ve calculated the impact on a $500,000 mortgage over a five year term.
The interest rate is 2.5% with a 25-year amortization.
|Frequency||Start Balance||Payment Amount||# of Payments Per Year||End Balance|
As you can see, making payments more frequently doesn’t make much difference even over a five year term.
They only make an impact over the course of the long amortization period.
Plus, pouring your money into your mortgage may not be your best financial option.
You may want to invest this money, pay off debts with high interest rates, or use it to tap into new opportunities.
Biweekly vs Accelerated Biweekly Payments
Lenders calculate bi-weekly payments by multiplying your monthly payment by 12 months and then dividing the result by 26.
For instance, if your monthly mortgage payment is $1,400 your bi-weekly payment would be $646.15 ($1,400 x 12/26).
For accelerated bi-weekly mortgage payments, lenders divide your monthly payment in two and withdraw one portion every two weeks.
That’s 26 payments annually.
For instance, if your monthly mortgage payment is $1,400 your accelerated bi-weekly payment would be $700.00.
You’re paying a slightly higher amount each payment when compared to bi-weekly payments.
This reduces your principal and shortens the amortization period.
Biweekly vs Semimonthly Payments
You pay your bi-weekly mortgage or loan payment every two weeks.
That’s 26 payments annually.
You pay your semi-monthly mortgage or loan payment on two specific days of the month.
Typically, these are the 1st and 15th of the month.
That’s 24 payments annually.
Did You Know?
Your lender may allow a yearly, penalty-free lump-sum payment, most (if not all) of which will be applied to the mortgage principal amount.
Frequently Asked Questions
- What is the best payment frequency for a mortgage?
When you check the chart above, you can see payment frequency has little effect in the short-term. Considering Canadians seldom stay in the same home throughout the lifetime of their mortgage, it doesn’t make sense to choose a payment frequency based on long-term benefits.
As a result, the best payment frequency for a mortgage is the one that is easiest for you to manage. You should be able to manage your other debts, save, and have enough disposable income to cover your everyday expenses.
If you intend to stay in your home for decades and have financial wiggle room, some of these options can help you build equity quicker and save you money.
- Do biweekly payments shorten mortgage length?
Yes, because you reduce your principal by a small amount which reduces the interest you pay. However, you will only notice the cumulative effect over the long-term. If you don’t intend to stay in your home for many years, you won’t see much difference.
Based on the example in the chart above, a 25-year mortgage paid through bi-weekly payments would shorten the amortization by three years.