Getting ahead of the game

Interested in paying your mortgage off faster? Aren’t we all! Why not follow this tried and true strategy? It will not only trim years off the length of your loan, but it can also save you tens of thousands of dollars. Tenants take note: this method can also be applied to making rental payments, to will help you turbo-charge the growth of your savings account!

 

You may have heard that paying your mortgage fortnightly instead of monthly can save you money, but have you ever wondered how it works – or why it’s so effective?

 

Generally, mortgage repayments are calculated on a monthly basis. If you have a loan of $300,000 and an interest rate of 6.75%, your monthly mortgage repayments will be around $2,100 per month, or $25,200 per year.

 

By making fortnightly mortgage payments instead of monthly payments, you can make serious headway with your loan.

 

Paying fortnightly simply means that you pay the equivalent of half of your monthly repayment every two weeks. In the above example, this means you’ll pay $1,050 per fortnight instead of $2,100 per month. This is a relatively easy practice to implement, particularly if your employer pays you every fortnight.

 

When you follow this method, you squeeze in one extra monthly repayment per year.

 

This is because instead of making 12 payments of $2,100 (totalling $25,200 annually), you’re making 26 payments of $1,050 (totalling $27,300 annually).

 

This extra amount comes directly off your loan principal, which reduces the amount on which future interest will be calculated. Because the amount of interest payable is less, more of your monthly repayment will go towards paying the principal of your loan. The result? Your mortgage gets paid off sooner – and you save thousands (or even tens of thousands!) of dollars in the process.

 

If you follow this exact same process, you’ll also squeeze in an extra monthly rental repayment each year. So what’s the point of that, you ask?

 

Let’s say Jim’s rent is $400 per week. This equates to $20,800 per year, or $1733 per month. Instead of paying the exact amount that is due, Jim pays $866.50 per fortnight – equal to half of the monthly amount payable.

 

The benefit of this is that Jim is slowly building up a buffer, as he is paying a little bit extra every fortnight. After six months, he will have paid ahead to such a point that he could skip his regular fortnightly rental payment. After 12 months, he will have accrued a whole extra month’s payment, allowing him to bank $1733 in his own bank account instead of paying rent that month.

 

Effectively, it’s a form of “forced savings” that can help you grow your bank balance, without putting in too much effort. If you combine this strategy with a regular savings plan, your house deposit will come together in no time!