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Do fortnightly repayments really make your mortgage shrink?

There is no shortage of talk at the moment about interest rates and the need for more Australian home owners to carefully consider their financial strategy when it comes to better managing debt.

One option that has been widely discussed in the media of late is refinancing and with increasing competition in the lending arena, this is definitely worth considering. But less has been said about how to best manage repayments in order to save not only interest, but years on the life of a standard, variable rate home loan.

While most borrowers just go with the flow and hand over their hard earned cash to the banks on a monthly basis, many financial planners suggest that making fortnightly repayments on your mortgage can save money and decrease your loan period by years. So exactly how does this work?

Basically, by halving your monthly repayment and paying this amount every fortnight, you end up making 26 rather than 12 repayments per annum, which is the equivalent of one extra monthly repayment every year on a Principal and Interest loan.

For instance, if you pay $2000 a month on your loan, you will effectively pay $24,000 over the course of a year, whereas if you pay $1000 every fortnight, you’ll have paid $26,000 over the year. 

This enables you to pay down your debt faster and cuts the interest applied to your loan in the process. If you think about it in terms of how the lender calculates interest charges on your home loan, which is done daily, paying that $1000 every fortnight on say a $150,000 balance means the interest will be calculated on $149,000 over two weeks rather than $150,000 for an entire month between repayments.

For those considering making the switch to fortnightly repayments, there are a couple of provisos to making it work. Firstly, this is a sound strategy if we are talking about your home loan, because a home loan is non-tax deductible debt, as opposed to an investment loan which allows you to claim the applicable interest charges.

Secondly, you have to ensure that the fortnightly repayments are exactly half of your monthly mortgage commitment, otherwise you won’t be reaping the benefits of that extra annual payment.

Overall, for home owners this is a great way to reduce your non-tax deductible debt faster and increase the equity in your own home sooner, which can ultimately become the stepping stone to venturing into property investment and building a lucrative property portfolio. So why wouldn’t you make the change?

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About

Rolf is Director of Metropole Finance and has twice been voted Australia's leading finance broker. He shares his wealth of knowledge about how to best use property finance to fund investments.
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