Do fortnightly repayments really make your mortgage shrink?

Do you have a principle and interest home loan? interest-rate-300x225

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 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. Interest Rates

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?

Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on

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Kate Forbes

About

Kate Forbes is a National Director Property Strategy at Metropole. She has 15 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a chartered financial analyst (CFA).
Visit Metropole Melbourne


'Do fortnightly repayments really make your mortgage shrink?' have 4 comments

    Avatar

    September 27, 2018 Home Loan Experts

    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.

    Reply

    Avatar

    December 31, 2017 Prashant Jain

    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.

    This article is so 90s.

    Reply

      Michael Yardney

      December 31, 2017 Michael Yardney

      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?)

      Reply

    Avatar

    December 16, 2017 Rob

    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.

    Reply


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