Payment Frequency Effect On Your Mortgage Principle

What are the different payment frequencies available and how are the payments calculated for each?

Most lenders, offer the following payment frequencies: Monthly, semi-monthly, bi-weekly, accelerated bi-weekly, weekly and accelerated weekly.

Monthly – You make your regular mortgage payments once per month, on a set day during the month. You would make 12 equal payments per year.
Semi-monthly – You make your mortgage payments twice per month, typically on the 1st and 15th of the month. The amount of your payment is calculated by taking the equivalent of your monthly mortgage payment and dividing by two (number of monthly payments). You would make 24 payments per year.
Bi-weekly – You make your mortgage payments once every two weeks. The amount of your payment is calculated by taking the equivalent of your monthly mortgage payment and multiplying it by 12 months to get your annual mortgage payment. Then, you take this annual payment amount and divide it by 26 (52 weeks divided by two) to arrive at the amount of your bi-weekly payment. You would make 26 payments per year. In some months (twice per year), you would make three payments instead of two.
Accelerated bi-weekly – You make your mortgage payments once every two weeks. The amount of your payment is calculated by taking the equivalent of your monthly mortgage payment and dividing it by two (there are typically 2 two-week periods within a month). In some months (twice per year), you would make three payments instead of two. You would still make 26 payments per year but your payment amount would be higher than it would with a regular bi-weekly payment, thereby paying your principal down faster.
Weekly – You make your mortgage payments once every week. The amount of your payment is calculated by taking the equivalent of your monthly mortgage payment and multiplying it by 12 months to get your annual mortgage payment. Then, you take this annual payment amount and divide it by 52 weeks to arrive at the amount of your weekly payment. You would make 52 payments per year. In some months (four times per year), you would make five payments instead of four.
Accelerated weekly – You make your mortgage payments once every week. The amount of your payment is calculated by taking the equivalent of your monthly mortgage payment and dividing it by four (there are typically four weeks within a month). In some months (four times per year), you would make five payments instead of four. You would still make 52 payments per year but your payment amount would be higher than it would with a regular weekly payment, thereby paying your principal down faster.

As an example, let’s look at a $200,000 mortgage at a fixed interest rate of 5% amortized over 25 years. The following chart illustrates how each payment frequency would affect your amortization and total interest cost.

Payment Frequency	Number Of Payments Per Year	Payment Amount	Amortization	Total Interest Cost	Total Interest Savings Vs. Monthly Payment
Monthly	12	$1,163.21	25	$148,963	$0.00
Semi-monthly	24	$581.01	25	$148,602	$361
Bi-weekly	26	$536.27	25	$148,571	$392
Weekly	52	$268.01	25	$148,409	$554
Accelerated bi-weekly	26	$581.60	21.5	$124,786	$24,177
Accelerated weekly	52	$290.80	21.5	$124,508	$24,455

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Bank of Canada Announcement - July 16, 2014

As you know, your variable rate mortgage, line of credit and/or student loans are all based on the Prime Rate and at 10:00 am EST, Wednesday July 16^th, 2014 the Bank of Canada again did what we expected them to do … they continue to maintain their overnight rate and in fact are not likely to make any change until possible 2016 now!  What this means to you is that once again the prime rate on your mortgage, line of credit or student loan will not change and remains at 3.00%. 

This is fabulous news but are you still making the most of the low payments you have!    If you have any high interest credit card debt that you can’t pay off in full each month, it might be  a good time for us to chat about a possible debt consolidation into your mortgage to save you some unnecessary interest… get a clear financial outlook void of expensive debt and start your summer off right and debt free! 

The Bank of Canada said “the global economy is on a lower growth track than was foreseen”  so  they will continue to wait and see economic growth continue on a more upward direction before increasing rates.

Fixed rates haven’t changed much at all since the last announcement and are around 2.99% to 3.09% for a five year fixed term.

The next announcement on any change to the prime rate is September 3rd, 2014 at which time I’ll be in touch again.

I wonder if I can ask a favour – this is a great time for first time home buyers who are thinking of purchasing to start with a pre-approval plan now to get them on track and save unnecessary interest.  It is advisable to start planning ahead and would be happy to provide an idea of closing costs and monthly budget payments to start those that you know on the path to home ownership.  Also, if you hear a friend or family member talk about going through a financially tough time – maybe I can help with some budgeting, credit counselling and debt consolidation options for them.  In either of these cases, would you mind passing my contact information on to them – this is very much appreciated.

www.themortgageguyniagara.com

A Great Way to Reduce Interest Not Paid to the Bank

I recently had a conversation with a Customer Banking Representative of a major Chartered Bank.  We were talking about the 20/20 pre-payment features included in many mortgage products.  I asked her how many people actually took full advantage of this option.  She smiled coyly.  I asked her, why the smile?  She told me that she was recently at a convention for her employer and they presented statistics that stated that only six (6) mortgage borrowers in the Ontario market took advantage of the full 20/20 feature for 2013.  Six!  She also stated that they were high income Bay Street earners.  Wow!

While many of us will never be in a position to use the feature to the fullest, I started thinking about the power of using this feature within the constraints of a personal budget.  This immediately brought to mind a recent experience I had consulting with some mortgage borrowers.

Imagine the following:

• Husband is a contractor
• Wife is employed in the medial administration field
• High amount of equity in home (approximately 50%)
• Mortgage requirement $280,000 on a refinance
• Past multiple refinances and equity take-outs over the years due to past credit challenges and seasonal wage fluctuations
• Credit scores have been brought back up over time with a lot of hard work
• A set monthly payment is preferred as it would allow them to budget accordingly
• Monthly budget comfort level is $2,000 for mortgage payment (principle and interest)

Options to Consider:

• Use a longer amortization period and the benefits of a 20/20 prepayment privilege to pay off the mortgage in a shorter period of time AND significantly reduce the total amount of interest paid
• The approach will have the $2,000 per month used as the baseline while increasing the monthly payment up to the $2,000 budget or to increase the monthly payment by 20%
• In the case where the P & I plus 20% increase are lower than the $2,000 budget, the difference is put into a savings account and accumulated each month and paid directly to the principle on each anniversary date across the amortization of the loan
• The primary benefit to this approach for these clients is that they can revert to the registered monthly obligation if required (due to seasonal wage fluctuations)

Let’s examine the numbers:

Term/Amortization Years	5-15	5-20	5-25	5-30
P & I Payment	$1,923.17	$1,541.99	$1,316.49	$1,168.77
Months/Years	180/15	240/20	300/25	360/30
Total Interest Paid Across Amortization	$66,168.92	$90,075.75	$114,943.58	$140,756.08
Extra Payment to Monthly Budget	4%	20%	20%	20%
New Months/Years	172/14.34	189/15.75	233/19.4	274/22.8
Extra Payments per Year to Budget	$0	$2,000	$5,000	$7,000
New Months/Years	172/14.34	171/14.25	174/14.5	177/14.75
Total Interest Paid Across Amortization	$62,824.08	$62,595.27	$64,150.41	$65,084.50
Difference in interest paid on each amortization if no 20/20 used	$3,344.84	$27,480.48	$50,793.17	$75,671.58

While many borrowers may not qualify for a 30-year amortization, this chart stresses a few important factors:

• If your situation warrants, consider not matching your monthly budget to your minimum principle and interest payment and use your prepayment privileges to pay directly to your principle by increasing the amortization period
• Use your prepayment privileges to reduce the amortization period and significantly reduce the amount of interest NOT PAID to the bank
• This strategy might be effective for the borrower if seasonal wage fluctuations are a concern

Please note there are many factors used to qualify each borrower and this example is used to illustrate the effect of using prepayment privileges across time.  Also, this example assumes a constant interest rate across the amortization (which may or may not happen – let me know if you have a crystal ball).

www.themortgageguyniagara.com

Applying for a Mortgage - What You Will Need

When you apply for a mortgage, your mortgage agent will ask you to complete a loan application.  The application shows information about the type of mortgage loan you’re applying for, as well as your personal financial situation.

To fill out the application, you (and the co-applicant, if applicable) need to give the mortgage professional detailed information about your financial situation. This will include:

• Full Legal Name(s)
• Social Insurance Number (SIN)
• Date of Birth (DOB)
• Dependents
• Marital Status
• Present and Previous Addresses
• Rent/Own with number of years
• Contact Information
• Current Employer
• Employment history
• Gross Annual Income (Base salary only)
• Occupation
• Currently Self Employed
• Previous Employer
• Other Income and Source
• Years/Length of time receiving
• The source of your down payment and closing costs
• Assets including:
• Bank account information with account balances
• Value of stocks and bonds
• Value of life insurance
• Value of automobiles owned
• Value of other major assets
• Liabilities/Debts including:
• Approval from Applicant(s) to pull the credit bureau which will ascertain specific debt obligations
• Alimony and Child Support
• Wage Garnishments
• Income Tax owing to CRA
• Current Mortgages/Properties Owned
• Property Information (the property the mortgage application is for)
• Consent Signatures and Dates

As you can see, there is a lot of information required for the mortgage application and thorough disclosure of all required items to your mortgage agent will ease the underwriting and approval process which will get you and your family into your new home much quicker.

A mortgage agent will add-value to this process and find the best product to suit your individual needs and the application/interview process is key to a successful outcome!

www.themortgageguyniagara.com