What I am going to show you is a way to decrease the amount of time it takes you to re-pay your mortgage while at the same time reducing the amount of interest you pay to the bank by over 20%.

What I am talking about is the use of accelerated payments. Many of you have heard of them, but let me explain how it works.

Typically when you start paying off a mortgage with a financial institution you have the option of re-paying using a monthly, bi-weekly, weekly, accelerated bi-weekly or accelerated weekly schedule. While almost all financial institutions give you these options many do not explain the net impact on your repayment schedule. Let’s take a look at a $100,000 mortgage to calculate what a difference it will make.

In this example lets assume that the borrower has just purchased a new home with a $100,000 mortgage at 6.3% that they intend to pay off over a 25-year amortization schedule (assume the rate stays constant for 25 years). Below is a chart that shows the amount that would be outstanding on your mortgage at select times during the mortgage repayment schedule using both a traditional monthly repayment schedule as well as an accelerated bi-weekly repayment schedule:

As you can see from the above, over the life of the mortgage you end up having an interest savings of $19,225.18. At the same time you end up being mortgage free over four years earlier. So what’s the catch you ask?

It is very simple. By dividing the monthly payment in two and making a payment every 14 days instead of monthly you actually end up making the equivalent of 13 monthly payments in a year: 328.88 x 26= $8550.88. If we divide this by 13 we see that it equals the exact amount of the monthly payment $657.76.

By making accelerated bi-weekly payments as opposed to monthly payments what we are in effect doing is making one extra payment a year. Since most people get paid bi-weekly this is also often easier from a budgeting perspective. The effect that the one extra yearly payment has on the repayment schedule is quite significant as it goes to work decreasing the principal balance outstanding at a much quicker pace.

A word of caution: If you are interested in using this type of repayment schedule to your advantage then make sure up front that you are able to do this with the lender you choose. One financial institution’s mortgage can not be all things to all people. In many cases it is prepayment privileges and accelerated payment options that the consumer ends up giving up in order to get a lower rate. A mortgage is a huge financial decision. Make sure you get good mortgage advice so that you get the mortgage that best meets your needs.

Until next time – best of luck in finding your home!

Calum Ross is one of Canada’s top ranked mortgage advisors. He has appeared on Canada AM, Investment Television, Report on Business Television, City TV, is an industry speaker and mortgage columnist. He holds both a B.Comm and MBA in Finance.