Are accelerated mortgages worth it? Do they result in less interest paid over the life of my mortgage? Is it the right option for me? Just what IS an accelerated mortgage? These are all questions we’ve heard before, so let’s get to the bottom of this mortgage payment option.
What is an Accelerated Mortgage?
An accelerated mortgage is a means of paying off your mortgage a bit faster by adding a small amount to your weekly or biweekly payments. The amount added is such that you make the equivalent of one extra monthly payment per year.
Many Canadians choose to make monthly mortgage payments, although they also have the option of paying semimonthly, biweekly, or weekly. Those who elect the weekly or biweekly options may opt to use the accelerated payment model. This approach ultimately shortens the mortgage’s lifespan, making you debt-free faster.
Example of Accelerated Mortgage Math
Let’s take a look at a quick example of how accelerated mortgages work.
Suppose Emma is on a monthly mortgage schedule, paying $1000 per month for a total of $12,000 in payments per year. She considers switching to a biweekly schedule. This would require her to make 26 payments per year, so in order to maintain her current rate of progress, she’d make each payment in the amount of $462, which is$12,000 divided by 26.
Eager to make faster progress, Emma then investigates an accelerated biweekly payment schedule. Under this arrangement she would make the equivalent of one extra monthly payment per year, for a total of $13,000 annually. This total, when divided by 26, amounts to biweekly payments of $500, a $38 increase over her non-accelerated biweekly total. Over the course of a five year term Emma will hasten her schedule by five months.
Is an Accelerated Mortgage Schedule Right for Me?
That’s tough to say, we don’t even know you (although, a free consultation could change that in a hurry!). It’s true that an accelerated mortgage plan will shorten the lifespan of your mortgage, which in turn will result in you paying less total interest. We find, however, that people tend to overestimate the amount of interest that will be saved.
Ask yourself: can your monthly budget absorb the higher hit? If the answer is yes, perhaps an accelerated mortgage is the right option for you. If not, it may be more prudent to stick to a more traditional payment schedule.
Don’t forget: opting for a biweekly payment schedule (accelerated or not) means that twice a year you’ll be dealing with the dreaded ‘three-payment month’.
What are the Opportunity Costs of Accelerated Mortgages?
If you have the capacity to tackle an accelerated mortgage schedule you will kill your mortgage quicker, which sounds like a great idea. On the other hand, it’s important to consider what else you might have done with that money. It could have been invested in RSPs, which decreases your taxable income. This could help you save for another purchase, such as an investment property, which could be a better use of money.
Are Accelerated Mortgages Worth It?
There is no definitive answer to this question, as it’s a decision that must be made on a case by case basis. Your income, your financial stability, and your short and long-term financial goals must all be considered. Some people like to get a leg up by paying their mortgage down more quickly. Others would prefer to put the extra money towards investments, home renovations, or even a bucket list trip. It’s your money!
At Pinsky Mortgages we want to help you understand the options available to you and the implications of each potential choice. We offer free consultations, where we’ll help you decide what’s the best option for you, taking into account your financial goals, economic situation, and attitude toward debt.