MONEY · MORTGAGE · Canada
Paying every two weeks takes three and a half years off the mortgage
The accelerated bi-weekly payment is not a financial trick. It is a thirteenth monthly payment a year, dressed up as a calendar.
By the Yoseri News desk · · 6 min read
This article describes the rules of Canada. Income tax, pension plans and tax-sheltered accounts do not transpose from one place to another.
These are not the rules of the region you picked (): this article describes those of Canada. The reasoning holds everywhere; the account names, the caps and the ages do not.
Your lender offers to let you pay every two weeks rather than once a month, and promises years off your mortgage. It sounds like a trick. It is not: it is an addition, and it fits on one line.
Where the saving comes from
A year has twelve months — and twenty-six fortnights. The accelerated bi-weekly payment takes your monthly payment, cuts it in half, and has you pay it twenty-six times.
Twelve monthly payments therefore become thirteen. Nobody took anything from you; you simply pay one more monthly payment a year, and all of it goes to principal.
| Rhythm | Payment | Payments a year | Paid a year |
|---|---|---|---|
| Monthly | $1,993.98 | 12 | $23,928 |
| Accelerated bi-weekly | $996.99 | 26 | $25,922 |
The gap is $1,994 a year — to the dollar, one monthly payment.
What that gives over twenty-five years
On a $350,000 mortgage at 4.79%, amortised over 25 years:
| Monthly | Accelerated bi-weekly | |
|---|---|---|
| Actual length | 25 years | 21 years 7 months |
| Interest paid | $248,194 | $209,039 |
| Difference | — | $39,155 less |
Three and a half years less, and $39,155 of interest that never came into being. For one extra monthly payment a year, paid without thinking about it.
Why it works so well
Because the extra payment attacks principal, and principal repaid early is the principal that would have carried the most interest. A dollar repaid in year 2 works for twenty-three years; the same dollar in year 22 works for three.
That is also why the effect looks out of proportion: you add 8.3% to what you pay each year, and you take 14% off the length.
What this calculation assumes
A 4.79% rate held for twenty-five years. In Canada that does not happen: the term is five years, and the rate is renegotiated. The figures above therefore describe a mechanism, not a forecast — the order of magnitude holds, the exact amount does not.
It also assumes semi-annual compounding, the Canadian convention, and that you can absorb $1,994 more a year without borrowing elsewhere. If that money comes off a 9% line of credit, the operation loses.
So what does this mean for you?
That the question is not “bi-weekly or monthly”. It is: can I pay one more monthly payment a year? If yes, the accelerated rhythm is the most painless way to do it. If no, changing the calendar changes nothing.
Yoseri’s Debt page shows, on your own loan, the share of each payment that goes to principal and the share that goes to interest. That is the only figure that says whether the rhythm bit.
Yoseri News is an educational publication. Nothing in this article is investment advice, a recommendation to buy or sell, or tax advice. Yoseri is registered as neither an adviser nor a dealer with any market authority. The tax rules described here are those of Canada, and the limits change: check your own entitlements before acting.