Fortnightly vs Monthly Home Loan Repayments – which is better?
Find out how two newlyweds saved $70,000 by switching their mortgage repayments from monthly to fortnightly.
When newlyweds Rob and Elisa bought their first home they made use of a loophole which is saving them tens of thousands of dollars in interest and shaving years off their loan.
The way it works is simple: switch your repayments from monthly to fortnightly.
Most lenders will calculate the fortnightly repayment rate by halving the monthly repayment rate, meaning you still pay the same amount each month but split it.
Because there are 26 fortnights in a year, this means you’ll end up making an extra monthly payment each year, paying off more of your loan and freeing you from debt faster.
Rob says it’s just common sense.
‘The quicker you can pay down the debt, the less you pay in interest down the track and when you discount that forward, it’s definitely worthwhile to pay things down as quick as you can.’
‘I think that’s one of the first things everyone tells you - to pay your mortgage fortnightly,’ he said.
Putting it into practice - How can fortnightly repayments save you money?
Say you have a loan of $300 000 charged at 6% over 30 years.Your monthly repayments would be $1798.65 with an annual repayment of $21 583.80.
If your lender calculates your 26 fortnightly repayments by halving your monthly repayments, you’ll pay $899.33 every second week for an annual total of $23 382.58. This equates to an extra payment of $1798.78 a year.
This means you’ll pay off your loan five years and six months earlier than normal and save a whopping $74 000 in interest.
‘The aim of the game is to pay down the debt and to build equity if you can by renovating, turning it over and making a profit that way, as opposed to relying on capital growth which is what people have been able to do more recently,’ Rob says.
There’s a catch though. Not every lender calculates repayments like this.
- Glenn is the Chief Strategy Office of 1st Choice Financial, Concord, NSW.
- Glenn specialises in mortgages, financial planning, self-managed super funds advice and mortgages and insurance for medical professionals.
Glenn Braganza from 1st Choice Financial in Sydney’s Inner West, says you should be aware of how lenders will calculate repayments before you change them to fortnightly.
‘Some banks will allow you to change your repayment frequency, but they’ll take your monthly repayment multiplied by 12 months and divided by 52 weeks. Then they’ll multiply this by two for fortnightly payments.’
If a lender decides to calculate the repayment like this you’ll pay a lower amount each fortnight, putting you back at square one. In our example this would mean you’d pay $830.15 every fortnight rather than $899.33.
According to Braganza even if you change your repayments to ‘true’ weekly repayments, you can still save around $400 over the course of the loan.
‘The problem occurs when you ring up a lender, because some lenders by nature will calculate it their own way and there’s no two ways about it. So if you ring the Commonwealth Bank they’ll calculate it by halving the monthly repayments and do that. But some lenders will calculate a true fortnightly repayment,’ he says.
Check how your lender will calculate fortnightly repayments. If you start paying fortnightly, you could be in the fast lane to paying off your mortgage too.
To see how much your repayments would be normally, use our home loan repayment calculator.
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Disclaimer: It is advised that borrowers speak with a mortgage broker or accountant regarding their home loan structure and repayment frequency to ensure that it will suit their financial situation.
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