This simple switch could help you pay off your mortgage quicker
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Though most borrowers in Australia opt for monthly home loan repayments, making repayments fortnightly – and possibly even weekly – instead could provide greater savings in the long run.
Mortgage broker Sandra Mallia runs Loan Market, a family-owned business in Melbourne. She has more than 23 years of experience in finance, specialising in home and investment loan lending.
Though most borrowers in Australia opt for monthly home loan repayments, making repayments fortnightly instead could provide greater savings.Credit: Rob Homer
“Where people will have the highest saving impact on their home loans is if they pay inflated fortnightly repayments,” says Mallia. “That is: paying exactly half of what the monthly repayments on that loan would be.”
Let’s work off the scenario of a $600,000 loan with a 6 per cent interest rate over 30 years (and for the example’s sake, that interest rate not changing). “Monthly repayments on this would be $3597.30. If you pay exactly half of that monthly repayment figure every fortnight, which is $1798.65, the savings are substantial. You’re going to save $148,126 over the life of the loan.”
(Note these calculations are based on a few other variables. They do not factor in an offset account, annual account fees or extra repayments being made to the loan.)
“You’ll save about five years off your home loan, if not more. That’s because you’re actually making another repayment.”
How does that work, exactly? Of course, there are 12 months in a year, but that doesn’t mean there are 24 fortnights. There are 26, as fortnights are made up of exactly 14 days.
If you halve your monthly repayments and pay every fortnight, you’re a whole month ahead on your loan each year. A welcome glitch, thanks to the Gregorian calendar.
This means you would be paying the equivalent of 13 monthly repayments as opposed to the 12 you would with a monthly repayment frequency. Using the loan scenario above, this results in paying $139 more per fortnight, with both principal and interest being paid off sooner.
Most banks offer these kinds of fortnightly repayments. But some banks charge based on a calculation of the total annual repayment amount divided by 26 (not 24) which does not offer the same benefits. It’s best to check what method is used before making the switch and if there are any charges associated with the method that reaps more rewards.
What about taking it a step further, and paying weekly as opposed to fortnightly? There is a saving, but it’s minimal – a $660 difference over the life of the loan.
What’s the ideal repayment frequency?
Although fortnightly and weekly repayments yield the highest rewards long-term, the best repayment option comes down to personal circumstances.
“I know it’s a delicate time, where people are struggling to make their mortgage repayments, and they’re perhaps looking at ways they can decrease what they pay rather than increase. So, a fortnightly repayment won’t be right for everyone.”
If you are considering moving to fortnightly repayments, it’s really about what your budget can handle. Could you afford to pay a little more towards your loan? Or would it be better to hold on to that money?
From a budgeting perspective, it could also be helpful to align your repayments with how often you are paid.
Mallia says it’s worth working with a mortgage broker to determine what your personal goals are and as such what repayment frequency could work best.
One final piece of housekeeping, regarding making loan repayments via direct debit. If you’re considering paying even more frequently – perhaps weekly – one key thing to keep in mind is ensuring there is always enough money in the account the bank is debiting.
Some people might not want the bank going into their account weekly, given some weeks might be heavier with bills. This could potentially lead to insufficient funds in that account for repayments, which could result in a late payment charge and/or affect your credit score.
Caterina Hrysomallis is a journalist specialising in culture, lifestyle and health.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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