OPINION: There are a lot of ways to save money on your mortgage and making extra payments, over and above the minimum required by the bank is one of the best ways to do this. If you pay off an extra $500, you not only save yourself the interest that that amount would have cost you this year but every other year of your mortgage. On new mortgages, that’s 30 years of interest saved on extra payments.
An extension of this strategy that occasionally pops up on social media is to pay your mortgage weekly not monthly. Think of it this way: if you pay $1,000 of principal off your mortgage every month, that $1,000 has 30-31 days where it accumulates interest and then is paid off in one lump sum. But if you pay weekly, in week 1 you owe $1,000, week 2 you owe $750, week 3 you owe $500 and for the fourth week you only owe $250. You are reducing the amount you owe on your mortgage faster by paying weekly so you pay less interest.
Note, it doesn’t matter how much the rest of the mortgage is because whether you pay monthly or weekly, the rest of the mortgage pays the same amount of interest. For reference though, a mortgage of $530,000 with 30 years left would pay around $1,000 of principal per month in the beginning.
So we can see that paying weekly would save you interest, the question is by how much? I’ve seen comments on social media saying tens of thousands over the course of your mortgage. Could that be possible?
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The amount of interest on $1,000 at 2.5 percent is $2.08 over a month. But paying weekly would mean only paying $1.20 worth of interest on that $1,000. Remember the rest of the mortgage had the same interest payment no matter what frequency you pay. A total savings of $0.88 for the month for a mortgage of $530,000.
So paying weekly rather than monthly would save you around $10.56 over the year. Actually a little more because your principal payments increase as you get further into your mortgage, but certainly no way near the tens of thousands of dollars mentioned. It’s unlikely to save you more than a few hundred dollars over the term of your 30-year mortgage.
Typically advisers would set up mortgage payments to synchronise with your salary payments. You get paid and then a couple of days later, your mortgage payment is made. This tends to reduce cashflow anxiety a lot more than trying to beat the system by paying more regularly than you receive salary payments.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
