Can fortnightly payments pay off your mortgage faster?

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 your loan over its lifetime. Literally, tens of thousands of dollars can be saved as a result of mortgage term reduction by simply changing your payment frequency from monthly to fortnightly.

When you make fortnightly repayments, you are essentially paying off an additional two or three days per month, 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 the interest rates month to month. Not only, you are saving interest by paying the loan off in advance, you are also potentially knocking years off your loan term. 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 your 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 your loan, which in turn impacts the amount of interest due on the entirety of the loan.

Because you have reduced the outstanding principal, the amount of interest you are paying on each and every future fortnightly payment is lower. Furthermore, it means with 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 $717,669 in interest throughout the life of the loan. This also includes a $1,000,000 principal for a grand total of $1,717,669. Changing the payment method to weekly, will reduce the total interest payment to $598,731which is a savings of $118,138 over the life of the loan.

Does Your Home Loan Stack Up?

To be able to take advantage of this savings opportunity, your home loan product must allow flexible repayments schedules.

If you are unsure of how much you could save by changing your repayments to fortnightly or weekly, reach out to one of our experienced mortgage consultants for free advice on how to structure your repayments and start saving straightaway.

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 reward you for making weekly or fortnightly repayments.

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. If it’s possible, you should definitely consider the benefits of making more frequently repayments ie; weekly or fortnightly.

If you would like to organise a confidential and free discussion on your current mortgage repayments, find out if you are eligible for other potential options, reach out to one of our friendly advisors.