Make 13 Payments a Year: The Bi-Weekly Overpayment Strategy Explained

What are bi-weekly overpayments?

Bi-weekly overpayments are a payment strategy where you make half of your regular monthly mortgage payment every two weeks instead of the full amount once a month. Because there are 52 weeks in a year, this schedule results in 26 half-payments, which equals 13 full monthly payments annually – one extra payment compared to the standard 12.

That extra payment is not an additional cost; it is an accelerated way to contribute more toward your mortgage over the year. The extra money can reduce your loan principal faster, which may shorten the time it takes to fully repay the mortgage and lower the total interest you pay over the life of the loan.

Sources: Rocket Mortgage, Mortgage Calculator

Bi-weekly vs monthly overpayment: the maths

The core difference between bi-weekly and monthly overpayments is the frequency of payments. With monthly overpayments, you pay 12 times per year; with bi-weekly overpayments, you pay 26 half-payments, effectively making 13 full payments in a year. This means that even if the bi-weekly payment amount is exactly half of your monthly payment, you are contributing more money annually than if you simply paid the standard monthly amount.

However, the benefit of bi-weekly payments is not automatic. If you make bi-weekly payments but the lender holds the extra half-payment until the end of the month before applying it, you may not see significant interest savings. Some lenders or third-party services apply the extra payment immediately to the principal, which enhances the benefit, while others may delay it, reducing the impact.

It is also important to note that bi-weekly payments do not necessarily mean you are overpaying in the typical sense. The strategy is about timing and frequency, not about choosing a higher payment amount. If your goal is simply to reduce interest and shorten the term, you could achieve similar results by making one extra full payment per year or by rounding up your monthly payments – both methods direct extra money to the principal without requiring a formal bi-weekly plan.

Sources: Rocket Mortgage, Mortgage Calculator

How to set up bi-weekly overpayments

Setting up a bi-weekly payment schedule involves coordinating with your lender and, in some cases, a third-party service. Here is a general step-by-step outline:

• Check whether your lender offers a bi-weekly payment option and what fees, if any, are charged for setting it up.
• Ask explicitly whether the bi-weekly payments will be applied immediately to your principal or held until the end of the month. Immediate application is generally more beneficial for interest savings.
• If you use a third-party company to manage payments, be aware that some charge fees and may not apply payments correctly. There have been cases of fraudulent services, so it is important to verify the company's legitimacy.
• Alternatively, you can set up automatic transfers from your bank account to your mortgage account every two weeks. Make sure the mortgage servicer applies the payments correctly.

Sources: Rocket Mortgage, Cream City Mortgage

Example: bi-weekly overpayment impact on a £200,000 mortgage

For this example, we assume a 30-year term and an annual interest rate of 5%.

Over the life of the loan, this extra payment each year can reduce the total interest paid and shorten the term. The loan would be paid off in about 25 years and 4 months, reducing the term by roughly 4 years and 8 months.

It is important to note that these figures are illustrative and based on the assumption that the extra funds are applied directly to the principal immediately. The actual savings may vary based on your lender's policies and how they apply the payments.

• Assumes bi-weekly payments are applied immediately to the principal.

Sources: Rocket Mortgage, Mortgage Calculator

Pros and cons of bi-weekly overpayments

Bi-weekly payments can help you reduce your mortgage faster, but they are not without drawbacks. Weighing these pros and cons can help you decide if this strategy suits your situation.

• Potential to pay off the mortgage sooner and reduce total interest, assuming the extra payment is applied promptly to the principal.
• Forces an extra payment per year without a large lump-sum commitment, which can be easier for some budgets.
• Some lenders charge setup or maintenance fees for bi-weekly plans, which can reduce or negate the savings.
• Some lenders do not apply the extra payment to the principal until later, limiting the interest benefit.
• If your mortgage has a prepayment penalty, paying it off early could trigger a fee.
• Third-party payment services may charge fees, apply payments incorrectly, or be fraudulent.

Sources: Rocket Mortgage, Cream City Mortgage

Alternatives to consider

If you are interested in the benefits of bi-weekly payments but want to avoid potential fees or complications, there are simpler alternatives:

One option is to make one extra full monthly payment each year. This can achieve similar savings to a bi-weekly plan without the need to enrol in a formal program.

Another option is to round up your monthly mortgage payment. The extra amount goes directly toward the principal and helps pay off the loan faster.

Before choosing any strategy, check with your lender about how overpayments are applied and whether any penalties apply.

Sources: Rocket Mortgage