If you think the hardest part of your mortgage journey is the application process, then you have yet to realise the commitment and patience it takes to repay your home loan for years or even decades.
For many home buyers, a crucial part of their loan strategy is their target schedule for repayments. Most home loan applications end up with a monthly repayment schedule, which means the borrower will be billed 12 times a year.
At first glance, you might think that changing your repayment schedule to weekly or fortnightly will not make any significant changes. You might even think that doing so will put you at a disadvantage, given that you are increasing the times you need to pay for your mortgage.
It will, however, do the opposite. The frequency of your repayments significantly affects two things: the total payments you will have made and the overall interest charges over the life of your loan.
The advantage of weekly and fortnightly repayments
Changing your repayment schedule to weekly or fortnightly will allow you to squeeze in an extra month's worth of repayments annually. In a year, there are 26 fortnights and 52 weeks, both of which are equivalent to 13 months.
A fortnight or a weekly repayment schedule will help you pay your mortgage off sooner and reduce the total interest charges over the life of your loan.
Calculating the savings
To give you an idea, imagine you are applying for a $375,000 home loan with a 3.5% interest rate and an amortisation period of 25 years. Loading these data to Your Mortgage's Repayment Calculator will yield a monthly payment of $1,877.34. Over the life of the loan, you will have paid $562,806.88, which includes the principal and the interest the loan accumulated.
For this example, let us divide the amount of monthly repayment by two to convert it to fortnightly payments and four to get weekly repayments.
If you pay $943.7 on a fortnightly basis or $471.84 weekly, it will take you only 23 years to finish paying the total repayments mentioned earlier. Take note that this is only an estimate, as the resulting number of years you need to pay off your loan can even be lower. This example assumes that the total repayments remain the same. In reality, however, changing your repayment schedule will result in lower accumulative interest charges.
What to consider before changing your repayment schedule
Lenders have different to determine your fortnightly and weekly repayments. Some lenders take your monthly repayment, multiply it by 12 months, divide them by 52 weeks, and multiply the quotient by two to determine fortnightly repayments.
If we use the example earlier, this means that your weekly repayments are down to $433.23 and your fortnightly repayments to $866.46. The gaps might seem not significant at first, but you will realise that with these amounts, you are not taking advantage of the one month's worth repayments.
Be sure to clarify these things to your lender. You can try some of the online tools available to help you calculate your potential savings if you change your repayment schedule.
Better yet, reach out to a broker. Mortgage brokers will be able to help you find lenders which allows flexibility in choosing your preferred repayment schedule. They also have the resources to help you determine how many years can you shave off of your loan term and how much savings you can get when you switch to fortnightly or weekly repayments.