The frequency that you choose to pay off your home loan can have a huge impact on the period of time you need continue making payments, as well as the total interest cost of the loan over its lifetime. Literally, tens of thousands of dollars and years of time can be saved by simply changing your payment frequency from monthly to fortnightly.
Depending on the month, by paying fortnightly, you are essentially paying off an additional two or three days, which over the course of a 30-year loan is around 900 days, or 2.5 years of repayments.
This is not including the additional benefit of minimising your principal amount for calculation of your interest rates month to month. Not only are you saving interest by paying the loan off in advance, you are also potentially knocking years off your loan. Depending on the terms of your loan, you could potentially end up with an interest rate saving of over 10% of your total interest expense and reduce the total lifetime of you loan by up to 5 years.
If your current arrangement is for a monthly payment, by choosing to pay your mortgage off fortnightly, which is to say that you will pay half of your monthly mortgage rate every fortnight, you are in essence making an entire month’s additional payment each year. That extra payment helps to lower the total principal of the loan, which in turn impacts the amount of interest due on the entirety of the loan.
Because you have reduced your outstanding principal, the amount of interest you are paying on each and every future fortnightly payment is lower. Again, this means that in each additional payment you make, more money is going towards paying off the principal, and less is going towards interest expenses.
Small Splashes Make Huge Waves.
Here’s an example:
A 30-year mortgage for $1,000,000 at a rate of 4.0% means the homeowner will pay $718,694 in interest throughout the life of the loan. This also includes a $1,000,000 principal for a grand total of $1,718,694. Paying one-half of the regular monthly mortgage bi-weekly makes the interest $707,479 which is a savings of $112,150.77 over the life of the loan.
Does Your Home Loan Stack Up?
For you to be able to access the opportunity to make these savings, you need to have a home loan that allows you to build equity in your home at a faster pace than what is specified in payment schedule. To do this, the loan calculations must take into account the outstanding balance of the principal at the end of each month or before calculating the following months repayment amount which includes the principal/interest component.
If your lender delays recognition of payment, this may impact the overall effectiveness of this strategy.
If you are unsure of how your current home loan balances are calculated, reach out to one of our experienced mortgage consultants for free advice on how to best structure your payment.
What if my lender doesn’t support fortnightly payments?
If you find yourself in a position where your home loan provider will provide no additional benefit for paying your loan off ahead of the agreed schedule, then it might be time to seek some professional advice. A mortgage is a long-term commitment and one that should be flexible enough to help you make the most of the ups and downs that are a natural part of life.
Making a commitment to paying off your home loan sooner will certainly have wide-reaching positive impacts on interest costs and the life of your mortgage, and wherever you can, you should definitely consider the benefits of this. Even a commitment to moving your payment frequency from monthly to fortnightly as we have shown can have a huge impact.
If you would like to organise a confidential and free discussion on your current mortgage, its flexibility in helping you pay your debt of sooner, or other potential options you may wish to consider moving to, then please reach out to one of our friendly advisors.
