How is paying fortnightly going to help me pay off my mortgage sooner?
Q. Like many borrowers, I’m interested in paying my mortgage faster and I’ve heard that paying ‘half monthly paid fortnightly’ is one way of getting rid of my debts sooner. How is paying fortnightly going to help me pay off my mortgage sooner?
A. Loan repayments are generally calculated on a monthly basis. However, you often have the option of paying either fortnightly or monthly. Paying fortnightly is simply paying the equivalent of half of your monthly repayment every two weeks.
Paying fortnightly allows you to squeeze in the equivalent of one extra monthly repayment per year. following example gives you an idea of how it works: Assuming your monthly repayments were $2,000, after a year you would have paid $24,000 (12 x $2,000). To pay fortnightly, you split your monthly payment in half, making a fortnightly payment of $1,000 ($2,000 divided by 2).
As there are 26 fortnights in a year, you will pay $26,000 (26 x $1,000). This is $2,000 (equivalent to one monthly payment) more than if you were making repayments on a monthly basis. extra amount comes directly off your loan principal, and reduces the amount on which future interest will be calculated. As the interest is less, more of your repayment will be going towards paying the principal off your loan, which means that your mortgage gets paid off sooner.