PROPERTY

The home loan hack to help you pay off your mortgage quicker

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Repaying your mortgage seems simple enough. You take out a loan and gradually pay it back over a series of (seemingly endless) repayments.

But what many home owners fail to realise is that a simple tweak to your repayment schedule could save you tens of thousands of dollars over the life of your loan.

It can also shave years off the amount of time required to pay back your debt.

pay mortgage weekly fortnightly monthly

The trick? Switch from monthly to weekly or fortnightly repayments.

So how does it work?

Most banks and lenders will calculate your fortnightly repayments by halving your monthly repayments. This means you still pay the same amount of money each month, but it's split into two payments.

But because there are 26 fortnights in a year, this means you'll end up making an additional monthly payment each year. The benefit? You can pay off your debt quicker, reducing the amount of interest you'll be charged over the life of your loan, saving both time and money.

Let's use an example.

Say you have a loan of $500,000, charged at 3.90% over 30 years. Your monthly repayments would be $2358, with an annual repayment of $28,300.

If your lender calculates your fortnightly repayments by halving your monthly repayments, you'll pay $1179 every second week, for each of the 26 fortnights of the year, for an annual total of $30,658.

In this example, just by switching to fortnightly repayments, you'd be putting an extra $2358 towards your loan every year.

As a result, you'd end up paying your mortgage off 4 years and 1 month earlier than you otherwise would have. You'd also save $53,872 in interest payments that would have come from your pocket.

What about weekly repayments?

By paying off your mortgage weekly, your repayments would be $590 (half of your fortnightly repayment amount). Home loan interest accrues daily, so making weekly repayments will save you more interest than repaying fortnightly - but only slightly.

Making weekly repayments would only save you $298 over the life of your loan. Not bad for paying the same amount of money!

Maths not your forte? Online mortgage repayment calculators can do the hard yards for you. Enter in the amount owing on your loan, your interest rate and your preferred payment frequency to see how much you could potentially save.

Is there a catch?

This depends on who you hold your mortgage with.

Not all banks and lenders will allow you to repay your loan this way. Some will let you change your repayment frequency, but they'll calculate your monthly repayment by 12 months, divided by 52 weeks. This amount will then be multiplied by two or four for fortnightly or weekly repayments.

So if you're planning to switch up your repayment frequency to save on interest, check with your lender to see how they calculate repayments. If the numbers aren't in your favour, it may be worth refinancing to a lender that offers greater flexibility around repayments.

Otherwise, you could be in the fast lane to paying off your mortgage quicker, saving yourself a whole lot of time and money.

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Graham Cooke is the insights manager at Finder.
Comments
r Coates
March 12, 2020 11.58pm

You are missing the point. This so-called trick is more about the amount you repay in a year than the frequency of repayments. There is no need to refinance a loan to do this. Any lender will allow additional repayments on variable rate loans. This can be done either by changing the direct debit amount or by setting up a periodical payment from a transaction account as often as you like. A professional mortgage broker won't tell someone to refinance just so they can pay more.

mick stewart
March 14, 2020 3.38pm

Hi Graham i pay my monthly mortgage but i also have a automatic deduction of $5 per day going onto it and it really starts to cut the interest paid etc especially now the rates are so low. Its only one cup of coffee a day but i dont notice it at all.

Mick

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