Home loan borrowers should take every opportunity they can get to save on interest and pay off their mortgages sooner. There are many ways to save on your home loan but perhaps one of the most tried and tested strategy is to change your repayment frequency from monthly to fortnightly.
How does paying fortnightly work?
Paying fortnightly is a simple yet effective strategy for paying off your mortgage faster — essentially it will involve you making repayments every two weeks.
You will have to speak with your lenders about this change, as the process of changing your repayment frequency might need approval.
Once your lender gives you the go-signal, you can then proceed working on your budget and making sure that you meet your mortgage dues on time every two weeks.
Why is paying fortnightly an effective strategy to save on mortgage interest?
Generally, loan repayments are generally calculated monthly. You often have the option of paying either fortnightly or monthly. Some mortgage holders even make weekly repayments.
Paying fortnightly is simply paying the equivalent of half of your monthly repayment every two weeks. Since there are 26 fortnights in a year, you will be making an equivalent of 13 monthly repayments instead of the usual 12.
That 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.
If you combine this with other strategies like using an offset account and making extra repayments, you will significantly shave off a significant amount of time from your home loan, allowing you to save on interest costs.
Fortnightly versus monthly repayments
To help you better understand the difference, here is a scenario: Let’s assume you have a 25-year mortgage amounting to $450,000 with an interest rate of 2.5%.
Using our Repayment Calculator, here’s what your payments would look like if you are making monthly and fortnightly repayments. Take note that the calculator assumes that interest is unchanged over the life of the loan.
|
|
Monthly |
Fortnightly |
|
Estimated Repayment |
$2,018.78 |
$1,009.39 |
|
Total Interest Paid (over the life of the loan) |
$155,632.64 |
$137,924.21 |
Things to consider before switching to fortnightly repayments
While making fortnightly repayments is one of the best ways to include in your home loan strategy, you will have to consider several things.
Bank arrangements
Some banks may have different arrangements on fortnightly repayments. Typically, your lender will base your fortnightly repayments on your monthly dues. When your bank does this, you will be able to squeeze in a month’s worth of repayment every year.
However, other lenders charge fortnightly repayment as your total annual repayments divided by 26 fortnights — this means that, for instance, a $24,000 yearly repayment will be divided into 26 bi-weekly dues.
You might not get a lot of benefit from the latter, as it only spreads your repayments.
Your budget
Since paying fortnightly will have you reaching out for your wallet more often, you will have to consider your budget. Do you have a steady and consistent stream of income to cover for these costs every two weeks? Do you have any other loans aside from your mortgage?
Keep in mind that paying fortnightly essentially forces you to make an extra repayment — ensure that your budget allows for you to do this first.
Other saving strategies
Paying fortnightly will work well with other strategies — for instance, if you are using an offset account, you will be able to save more on interest costs.
You can also consider making extra repayments on top of your fortnightly repayments. This way, you can even reduce the interest charged on your loan. However, ask your lender first if there are fees when making extra repayments.
Also read: Repayment flexibility versus rate
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| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.06% p.a. | $2,408 | Principal & Interest | Variable | $0 | $530 | 90% | Featured 4.6 STAR CUSTOMER RATINGS |
| Disclosure | |||||||||
5.99% p.a. | 5.90% p.a. | $2,396 | Principal & Interest | Variable | $0 | $0 | 80% |
| Disclosure | ||||||||||
6.14% p.a. | 6.16% p.a. | $2,434 | Principal & Interest | Variable | $0 | $350 | 60% |
Collections: Mortgage Repayment Buying a home
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