Mortgage Payments

Mortgage payments consist of a principal and

interest payment. When a mortgage is

amortized over the standard 25-year term, it

means that a consistent monthly payment will result in

the mortgage being paid off after 25 years. Initially, a

high portion of the mortgage payment goes towards the

interest. Over time, the principal balance is gradually

paid down until the outstanding principal balance is zero,

thereby terminating the mortgage.

For example, on a $300,000 mortgage at 4.75 per cent

with a 25-year amortization, the monthly payments are

$1702.37. For the first payment, $1175.92 of the

payment goes towards interest and the remaining

$526.45 goes to pay down the principal. After the start

of year 12, $820.05 of the payment goes towards interest

and the remaining $882.31 goes to pay down the principal.

At the start of year 24, only $152.56 goes towards

interest and the remaining $1549.81 is allocated to pay

down the principal.

The main factors to determine in selecting martgage payment

options are the borrower's cash flow requirements.

The usual payment options are monthly, biweekly,

accelerated biweekly, and weekly.

Monthly payments are generally appropriate for people

who receive monthly paycheques. As shown below,

weekly mortgage payments don't make much of a difference over

the long term, and most people find it is a hassle to make

a mortgage payment each week. Accelerated biweekly mortgage payments

(a mortgage payment every 2 weeks for a total of 26 payments per

year) are an increasingly popular choice and a great way

to reduce the total mortgage repayment duration.

Accelerated biweekly mortgage payments are ideal for people who

get a paycheque every two weeks, since it gives them an

effective and convenient way to pay off their mortgage.

The table above compares the various mortgage payment

frequencies based on a $300,000 mortgage at 4.75 per

cent with a 25-year amortization.

The accelerated biweekly amount is calculated by

dividing the monthly mortgage payment by two, and the total

interest cost is over the lifetime of the mortgage.

Compared with a monthly payment, the accelerated

biweekly mortgage payment enables the borrower to reduce the

outstanding balance every two weeks, thus reducing the

overall interest costs. On a mortgage of $300,000, an

accelerated biweekly mortgage payment of $851.19, as compared to

a monthly payment of $1,702.37, would result in the

amortization period being reduced from 25 years to 21.5

years, which leads to a $34,257 interest savings over the life

of the mortgage.

The pre-payment and extra payment privileges vary

significantly amongst the different financial institutions.

This is where the knowledge of a mortgage broker can

help borrowers select the appropriate mortgage for their

needs, based on the borrower's financial situation, long-,

and short-term financial goals.

Jeff Hui is a mortgage consultant with Mercury

Mortgages and can be reached at 905-273-4234 or

jeff@mercurymortgages.com.

Mortgage: A legal document that pledges property to the

lender as security for the payment of a loan.

Amortization: The time period it takes to completely pay

off a mortgage, assuming the interest rate and payments

remain the same for the life of the mortgage. A mortgage

with a 25-year amortization period means that if all

regular payments were made on time and the payment

and interest rate remained the same, it would take 25

years to pay off the mortgage.

Payments: The amount of money that the borrower needs

to pay to the lender on a regular basis to pay the principal

and interest on a mortgage loan.

Biweekly payments: Two mortgage payments per month, usually on

the 1st and 15th days, for a total of 24 payments per year.

Accelerated biweekly payments: A mortgage payment every two

weeks, for a total of 26 payments per year.

Principal: The amount of money borrowed for a mortgage.

Pre-payment privilege: A privilege for the borrower to pay

off part of any outstanding principal.