Your payment frequency can impact the length of your home loan and the total interest you pay.
Your home loan repayments are likely to be one of your biggest expenses. This makes them a good place to start if you are looking to cut cost. Small changes to your interest rate or loan term can have a dramatic effect on the amount you end up paying in interest.
A simple, yet effective, trick to reduce your home loan balance is to make fortnightly repayments. Doing so will increase the amount you repay each year and get you out of debt sooner. How does this work? Let’s have a look;
Loan repayments are normally made monthly. This means you make 12 repayments each year. When you make fortnightly repayments, you end up make the equivalent of 13 repayments each year.
Here’s an example to demonstrate.
Let’s assume you have a 30-year loan for $300,000 and the interest rate is 4.5% p.a. Your monthly repayments are about $1500. By the end of the year, you would have paid roughly $18,000.
If you choose fortnightly payments your monthly repayment is split in two, for our example, it would be $750. However, and this is where you get the saving, you make repayments every two weeks, not twice a month.
There are 52 weeks in a year, so making repayments every second week means 26 repayments to a total of $19,500 each year.
You end up making 13 months’ worth of repayments each year!
Does it make that much of a difference? Yep. For our example, fortnightly repayments would have saved $40,000 in interest charges over the life of the loan and had it payback four years quicker.
Making fortnightly repayments isn’t any different to making additional repayments. Anything on top of your minimum monthly repayment will have the same effect.
The benefit of fortnightly repayments is that it doesn’t feel like you are paying any extra each month.
Play around with our mortgage repayment calculator to see how much you will save with fortnightly repayment.
If you want to save more on your mortgage you should first compare home loans in Australia to make sure you’re getting the best deal available. After that, fortnightly repayments are an easy way of getting ahead on your mortgage.Read More →