One of the easiest tricks in the book to pay off your mortgage faster is to make bi-weekly payments instead of monthly payments. Any mortgage calculator will show this and, since most people are paid either bi-weekly, it makes a lot of sense to match your mortgage payment schedule to your income schedule.1
Here’s another method my wife and I are using to pay down our mortgage quicker:
- Everything flows into our main bank account: payroll, other income, gifts, etc.
- That same bank account makes all the bill payments, all the transfers, etc.
- Our mortgage is held at a different financial institution than our “operating” bank account.
- The mortgage is paid out of a bank account held at the same institution as the mortgage.
- Transfers are made every two weeks from our operating account to the “mortgage” bank account.
- Our mortgage bank account is not easily accessed; we do not have a debit card for the account, we do not have quick or easy online access on our phones to the bank account, and the bank account has usage fees if we complete any transactions other than mortgage payments.
Based on the graphic, you can probably figure out the rest of the story. Our mortgage payment is $XX and is paid out of the mortgage bank account every two weeks. The transfer we make from our operating bank account to the mortgage bank account is $50 more than the required mortgage payment. And all these transfers are pre-authorized transfers which require signatures and paperwork to change.
After a year, it’s easy to see how a balance of $1,300 builds in that mortgage bank account. At the end of the year, we take the $1,300 and make an extra, principal-only mortgage payment. And then we start all over.
On a $250,000 mortgage, this additional $50 in the bi-weekly transfer dramatically cuts down on mortgage costs in the long run. As per the Government of Canada’s Mortgage Calculator, the $1,300 additional annual payment results in (assuming a 3% interest rate on a 5-year term amortized over 25 years):
- Savings of $13,191.55 in interest costs over the course of the mortgage.
- Mortgage payoff 35 months sooner.
- Savings of $407.52 in interest costs over the course of the first 5-year term.
“OK, Josh. Great idea,” you say.
“But why not just make your mortgage payment higher? Clearly you can afford more.”
Aha! Great question.
The point is that you are locked into a lower required cash outflow on a bi-weekly basis than if you made larger mortgage payments. Larger mortgage payments will pay off your mortgage faster and will result in greater interest savings in the long run, to be sure.
However, should a crisis strike, having a lesser required cash outflow may be nice to have. That extra $1,300 is exactly that: extra. It’s not required. You could use the $1,300 and invest it in the stock market. You could save it in a Tax Free Savings Account and use the money to purchase an investment property down the road. If you have children, you could put the money into an Registered Education Savings Plan and receive the 20% RESP governmental grant on top of it.
Whatever you choose to do with the $1,300 is up to you. Extra mortgage payments simply provide a guaranteed return.
I was updating all our personal finances the other day and completely forgot about the fact that we have an extra $50 transferred every two weeks. Seeing the accumulated balance was a nice little revelation; there’s nothing quite like the rush you get when you stumble across “found money”.
And I figured, perhaps, this could help some other folks to get ahead of their mortgage a little quicker.
In fact, I mostly think it’s best to match your payment schedule to your payroll schedule for investment-type purchases in general. If you are paid in big lump sums, then pay for things with cash! But if you are a wage-earner or are paid on a consistent schedule, it makes a lot of financial sense to use debt to make the investment, pay some tax-deductible interest, and use the asset to earn a return greater than your interest rate. ↩