Do fortnightly repayments really make your mortgage shrink?
Do you have a principal and interest home loan?
Well if so, read on as this tip could save you a fortune over the years.
It's a method to best manage your home loan 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 having 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 a non-tax-deductible debt, as opposed to an investment loan that 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 homeowners, 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?
About Brett WarrenBrett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.
4 comments
Home Loan Experts2018-09-27 14:06:06
Home loan is that part of finance which is really difficult to analyze, so you need an expert and I guess I have got the expert in this post. It was very helpful thanks for sharing.
With invent of offset account, simply get your salary/income paid into your offset account and you don’t have to worry about how often or how much you pay towards your mortgage. All money is saving you interest.
Also, this plan only works best for ...Read full version
Unfortunately this does not work for car loans.For a three year car loan of $484.62 monthly OR $233.67 fortnightly does not incur any savings for the term of the loan. Thats the way the loan has been structured. If I pay out the loan this month (Dec ...Read full version
Home loan is that part of finance which is really difficult to analyze, so you need an expert and I guess I have got the expert in this post. It was very helpful thanks for sharing.
With invent of offset account, simply get your salary/income paid into your offset account and you don’t have to worry about how often or how much you pay towards your mortgage. All money is saving you interest.
Also, this plan only works best for those who get paid fortnightly.
Prashant I agree with your suggestion of using an offset account smartly – there are many ways to skin a cat (oops ! is one still allowed to say that?)
Unfortunately this does not work for car loans.For a three year car loan of $484.62 monthly OR $233.67 fortnightly does not incur any savings for the term of the loan. Thats the way the loan has been structured. If I pay out the loan this month (Dec 2010) will incur and exit fee of $1000.