Rethinking your repayments

We had a question over the weekend from a buyer who wanted to know if paying off a mortgage fortnightly instead of monthly actually made much difference. If you’ve been wondering about the benefits of this idea as well, here’s a brief summary of how it works…

Let’s take a hypothetical example of a couple who buy a home with a mortgage loan that requires repayments of $3,000 per month. This adds up to the equivalent of paying $36,000 per year. Suppose this couple decided to split the monthly repayment in half and pay $1,500 every fortnight.

If you add it up, these home owners would end up making 26 payments per year, which would mean that they repay a total of $39,000 annually. That’s an extra $3,000 paid off the loan each year. In fact, there is an additional benefit to this approach that many people overlook.

If you owed $100,000 on a loan, by paying at the end of each month you accrue interest on the full $100,000 for the month. But in most cases your interest is calculated daily, so a fortnightly repayment means you are paying interest on a slightly lesser amount for half that month.

So, as we explained to the buyer, the simple answer is that by making payments fortnightly you can save interest as well as paying off your loan more quickly. We hope that helps.

Disclaimer: The contents of this article are believed to be accurate at the time of posting. Any advice here is of a general nature only and has not been tailored to your personal circumstances. Please seek professional advice prior to acting on this information.