FinancialPlus

Changing the way that you repay your home loan can make a difference to how quickly your loan is repaid.

Most people are paid weekly or fortnightly and budget accordingly.

The amount required to be set aside for electricity, phone bills and council rates – to name a few – are converted back to a per week or per fortnight amount so that people know how much they need each pay.

The same applies to loan repayments.

People get their monthly repayment amount and then convert it to the amount that they have to put aside each pay.

For example ….. if the home loan repayment for Joe Bloggs is $2398 per month (based on a $400,000 loan at 6% interest), there’s a good chance that Joe (who is paid fortnightly), will allocate $$1,199 from his pay each fortnight to cover this.

What usually happens though is that Joe doesn’t think about this too much and lets the repayments be deducted on a monthly basis without realising that he is actually paying less than what he had budgeted for.

This is because $1199 per fortnight over a whole year is the equivalent of $31,174 per year but the lender will only have collected $28,776 in repayments (12 times $2,399) but it’s what Joe does with the excess that makes a huge difference.

Most likely he has spent it but the following table shows the impact of changing your repayment frequency.

Paying fortnightly can make a huge difference
 RepaymentTerm of LoanReduction
in Term
Savings
Monthly Repayment$2399.0030 yearsN/AN/A
Fortnightly Repayments (equal to half of monthly repayment)$1199.0024 Years 7 months5 years 5 months$58,655 (after allowing for extra repayments)

It’s amazing! So …. if you budget by dividing your monthly repayment by two, then you should consider changing to fortnightly repayments to save a fortune!

Some important notes ….

  • This is general advice that applies to most lenders but not all – please check with me before changing;
  • If you are on Fixed Rates and did not ask for repayments to be made fortnightly from the beginning, you will need to make sure that you do not incur break costs through these extra repayments; and
  • This does not apply to loans on an Interest Only basis as repayments during this period must be made on a monthly basis.

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