The easy way to pay off your loan 4 years early

You could save $85,819.90 in interest and pay off your loan 4 years and 9 months earlier by changing your repayment frequency from monthly to bi-monthly.

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jar of Australian moneyChanging your repayments from monthly to bi-monthly can make a massive difference in the amount of interest you pay and time spent paying your loan off. Let’s jump straight into it with an example.

Ciaran and Lara are looking to buy their first home in Paddington, Sydney, NSW. They have decided to take out a loan of $500,000 charged at 5.00% over 30 years. They have worked out that their monthly repayments would be $2,684.11 with a total loan cost of $966,278.92.

However, after analysing their budget and speaking with their mortgage broker, they decided that they could reduce the amount of interest payable on their loan by making their repayments more frequently. By rearranging their personal finances, they discovered that they can afford to make their repayments on a bi-monthly basis.

By cutting their monthly repayments in half and making them every fortnight, they calculated that their bi-monthly repayment would be $1,342.05 with a total annual repayment of $880,459.02. By committing to their repayments more regularly, they would save a total of $85,819.90 in interest, and reduce their loan period by 4 years and 9 months.

How does it work?

Typically loan repayments are calculated on a monthly basis. However, depending on your lender, you will normally have the choice of making your repayments either fortnightly or monthly. When you make your repayments fortnightly, you are simply paying the equivalent of half your monthly repayment.

Paying fortnightly means you can squeeze in one extra monthly repayment each year. This additional amount comes directly off your loan principal and reduces the amount on which future interest will be calculated. As there is less interest, more of the repayment will go towards paying off the principal which means that your mortgage is paid off sooner.

Making your repayments fortnightly is easy to manage if you can schedule your repayments with your payment cycle so that you can save thousands in interest over the life of your loan.

Monthly vs fortnightly repayments

When contemplating different home loan products, it’s worthwhile considering how often you can service your repayments.

Our bi-monthly calculator has been formulated to illustrate how much you can save if you make fortnightly repayments instead of monthly repayments. In effect, the calculator highlights that by making fortnightly repayments, you can make one extra repayment every year which reduces the loan term and total interest paid.

Find out how much you could save by making your repayments fortnightly, rather than monthly.

To use our bi-monthly calculator, you’ll need to input information such as your loan term, the loan amount, the interest rate, and the number of monthly repayments you have already made (if you’ve already begun servicing your loan).

Important: Understand how your lender calculates repayments

Many Australian home buyers are making their repayments more frequently so they can obtain homeownership sooner.

However, it’s important to check with your lender to see how they calculate repayments so you can understand whether switching your repayment frequency will positively impact your mortgage.

Typically lenders calculate the fortnightly repayment rate by halving the monthly repayment rate, meaning that you still end up paying the same amount each month. However, with 26 fortnights per year, you’ll end up making an extra monthly payment every year which reduces your loan term.

However, not every lender calculates repayments this way, so you’ll need to confirm your lender’s repayment terms to see whether fortnightly repayments will help you fast-track your way out of debt.

For instance, some lenders will take your monthly repayment multiplied by 12 months and divided by 25 weeks. Then they’ll multiply this by two for bi-monthly payments. In this case, you’ll pay a lower amount each fortnight, which will not reduce the term of your loan or total interest payable.

Long-term gain

Making your repayments on a bi-monthly basis is a simple way to reduce the total amount of interest you pay as well as your overall loan term.

By understanding your cash flow, you will be able to take control of your finances and put in place the required steps to pay off your mortgage sooner. While making one extra repayment each year may not seem like much, you could potentially save thousands on the interest you pay towards your loan in the long run.

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