Behind the freshly painted walls and newly potted plants in your new home, is a mortgage. It’s a simple fact of property ownership, and although not the most exciting or even the most enjoyable part of the experience, it doesn’t have to be the worst.
Understanding how your mortgage works can help you pay it off faster and save money in the long run. There’s no need to get a degree in accounting or borrow every finance book from your local library. Instead, we’ve broken down the difference between monthly and fortnightly payments and how they’ll effect your wallet.
In short, if you can afford to pay more than the minimum requirements on your mortgage, however frequent, you should. The higher the repayment, the faster you’ll pay off your loan and the less interest you’ll pay. Understandably, a bigger payment may seem a bit out of reach. But there is a way that you can squeeze more payments into the same amount of time.
While you make payments on your mortgage monthly, fortnightly or weekly, interest is calculated daily and is based on how much you have left to pay on your loan. By making more frequent payments, you’re decreasing the size of your loan more often, lowering the amount of interest charged. The difference might not seem very obvious in the short term but over the course of your loan, you could save thousands of dollars.
The great thing about switching to fortnightly payments is that you shouldn’t feel a pinch. Your payments are exactly half the size of what they would be if you paid monthly, but you pay them twice as often. You also end up effectively making an extra payment in a year as there are 26 fortnights in a year.
Imagine you have a 30-year loan for $200,000. Paying it monthly will mean repayments of $1,115.58 per month and you will pay $201,609 in interest over the course of the loan. Now imagine you switch to fortnightly repayments. You now need to pay $557.80 per fortnight; half the monthly amount but twice the frequency. It's a small change but it would save you $37,830 in interest across the term of the loan, and have you completing your mortgage 59 months earlier1.
At the end of the day, it comes down to what works best for you and your family. In some cases, fortnightly payments are perfect because it might sync up with pay day, making budgeting easier, and reducing the chance you accidentally miss a payment due to insufficient funds being in the account.
If you would like to further discuss how changing your payment schedule can affect your mortgage repayments, we’re always here to chat.
1Calculation assume the Keystart interest rate of 5.34% (as at 16 November 2018). Current interest rates are available here.
For more information, visit the MoneySmart website linked.