How to choose a mortgage payment schedule

So you’ve found your dream house and passed the mortgage stress test. Now, you have to handle the serious business of planning your mortgage payments. But how do you choose the right mortgage payment schedule? Most Canadians pay their mortgage monthly. However, it’s wise to explore all of your options since making more frequent payments can save you interest in the long run — particularly in elevated rate environments.

In this article, we’ll dive deep into the factors that affect your mortgage payment, as well as the different mortgage payment schedules you can choose from, so you can feel confident about your repayment plan.

The right mortgage payment schedule is the one that works best for you. Before you decide on your payment frequency, you need to crunch some numbers and see if you can squeeze in extra money and go for an accelerated mortgage payment.

Furthermore, you also need to consider how often you receive your paycheque. Some people get paid monthly, while others receive weekly or biweekly paycheques. Choosing a schedule that coincides with how often you expect money in your account makes paying your mortgage less of a pain.

A mortgage payment is the amount of money you pay regularly to a lender to repay a loan you made to purchase your home. Your payment covers the principal amount you owe and the interest on the loan. The principal is the amount you initially borrowed, while the interest is a percentage of the loan balance the lending institution charges.

Aside from principal and interest, your mortgage payments may include other costs, like mortgage loan insurance and property taxes. If your down payment on the property is less than 20%, you must buy mortgage loan insurance, which is usually added to your loan principal. But you can also pay it in one lump sum.

When it comes to property taxes, your lender will divide your annual property tax payment into the number of mortgage payments you’ll be making in a year and include that amount in your mortgage payment. They will hold that money in an escrow account (where funds are held in trust by a third party), and when it’s time to pay the property tax, the lender will pay the municipality on your behalf.

Several factors determine how much your mortgage payment will be, including:

• Total mortgage amount: Also called the mortgage principal, this is the full price of your new property, plus other charges like mortgage default insurance, and minus your down payment.
• Interest rate: The lower your annual interest rate, the lower your mortgage payments will be.
• Length of mortgage: Also called the amortization period, this is the total time it takes you to pay off the entire loan. The longer the amortization period, the more interest you’ll pay over the life of the loan.

Payment frequency: A monthly payment is the default and most common schedule. However, you can always increase the frequency by going for a semi-monthly, biweekly, or weekly mortgage payment schedule.

A mortgage payment schedule refers to how often you pay your lender. It’s wise to consider which payment frequency works best for you, rather than just defaulting to a monthly payment. For example, if you are paid weekly, you may opt for a weekly mortgage payment. Or, if you want to pay off your mortgage faster, choosing an accelerated biweekly payment is smart.

To illustrate how payment installments are calculated, let’s assume a home purchase price of $500,000, a 20% down payment of $100,000, a 5% mortgage rate, and an amortization of 25 years using a mortgage calculator.

Here’s how much you would pay each installment for different payment schedules:

Monthly mortgage payments

The monthly mortgage payment is the standard choice on most mortgages and the most common payment frequency. Lenders also use this to calculate how much you would pay if you had other payment schedules.

In the example above, you will pay $2,326 monthly for a $400,000 loan. 

Weekly mortgage payments

With a weekly mortgage, you’ll make 52 payments in a year.

In the example above, you’ll have to pay $537 weekly for a $400,000 loan.

Biweekly mortgage payments

With a biweekly mortgage payment, you’ll pay 26 installments annually.

In the example above, you’ll have to pay $1,074 every two weeks for a $400,000 mortgage. Biweekly payments usually shave a month off your mortgage length, because you’ll be paying less interest over the life of your mortgage.

Accelerated weekly mortgage payments

Like an accelerated biweekly mortgage payment, you add another month of payment on top of your annual mortgage. Then, you pay every week or in 52 equal installments in a year.

In the example above, you’ll have to pay $582 weekly for a $400,000 loan.

Accelerated biweekly mortgage payments

With an accelerated biweekly mortgage payment, instead of multiplying your monthly payment by 12, you multiply it by 13. Then that amount is divided into 26 installments, which you’ll pay every two weeks. 

In the example above, you’ll have to pay $1,163 every two weeks for a $400,000 loan. Since you’re making the equivalent of an extra monthly payment every year, an accelerated biweekly mortgage payment is a great way to pay off your mortgage early. Using this method, you can reduce the time it takes to pay off your mortgage and potentially save thousands on interest.

The main difference between accelerated and regular mortgage payments is that you pay off the loan much faster with accelerated mortgage installments. Paying an extra month with an accelerated mortgage payment every year means saving thousands of dollars in interest costs.

If we use the same example above, assuming a $500,000 home with a $100,000 down payment, a 5% interest rate and a loan length of 25 years, here’s the difference between paying biweekly versus accelerated biweekly:

As shown in the table above, your estimated total savings over the years is $47,576 if you go for an accelerated biweekly mortgage payment.

Buying a home is an exciting milestone, especially if you’re a first-time homebuyer. But before committing to anything on paper, do your due diligence first. Decide which mortgage payment frequency works for your budget and schedule, and stick to it. Remember, choosing a payment frequency doesn’t set your mortgage payments in stone. You can always adjust your frequency later if your circumstances change.