When I bought my first house way back in the beginning of 2000, I set up the mortgage payments to be withdrawn from my account every week. I had heard and read that making payments more frequently would reduce the time necessary to pay off the mortgage significantly. Instead of keeping the money in my account and paying a monthly payment at the end of the month, you would save on interest by paying the weekly amounts ahead of time.
So what happened? Well, I hated the weekly payment because at the time I was being paid twice a month so every few months there would be three mortgage payments in one pay period which would mess up my budget. I decided to switch the payments to semi-monthly to match my pay cheques.
Does this mean I’m paying thousand$ more in interest costs? Not a chance! I had a conversation with a good friend of mine around the time I switched from weekly to semi-monthly payments and he explained to to me that the reason that “weekly” payments (as promoted by the banks) pay the mortgage down quicker is because you are paying more to the principal, not because you are making more frequent payments.
For example if your monthly mortgage payment is $1200 then if you want to do weekly payments, the bank divides the monthly payment by four which means your weekly payment is $300. The problem is that there are more than four weeks per month so by paying one quarter of the monthly payment each week, you are in effect paying more money into your mortgage.
Over the course of one year, $1200 per month total $14,400. $300 per week totals $15,600 over the year which is $1300 per month which is a $100 more than our original monthly payment. This is why the “weekly” payment method pays down the mortgage faster.
What does all this mean?
Don’t worry about the frequency of your mortgage payment, just set it up so it fits your budget and pay schedule.
Increasing your total payments along with occasional extra payments will result in a mortgage that is paid down quicker. Whether you pay daily, weekly, bi-weekly, fortnightly, semi-monthly, thrice monthly or once a month (as I do) you should consider the total amount you pay each month and try to keep that as high as possible.
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