You may have heard that changing to fortnightly loan repayments is a good idea… but is it?
Here we explain why people say it is, and expand on the concept.
A mortgage can be a significant cost each month and it can ultimately will cost more than most people expect.
For example, with a $400,000 home loan paid over a standard 30-year period using an average interest rate of 5.50% you will be paying almost $680,000 back to the bank which includes interest of almost $280,000.
Obviously, you don’t want to pay any more than absolutely necessary and so people look for ways to save money.
Increasing Your Repayments Now
If you have extra money available to throw at your mortgage it is always a good idea to increase your repayments now while you may be able to afford it. An extra $100 per week would see this $400,000 mortgage be paid off just over 9-years earlier which would mean saving almost $150,000 in the interest that you would pay.
But can you afford an extra $100 per week right now?
Many people can’t and so a subtle way to pay your mortgage off faster can be to switch from monthly to fortnightly repayments.
Paying Fortnightly Loan Repayments
One way to save on your home loan is to switch to fortnightly loan repayments.
Effectively, by paying fortnightly you will make an extra monthly home loan payment each year, which can cut years off your loan which will save you literally thousands of dollars.
With a fortnightly repayment plan, instead of paying your entire mortgage payment once a month, you pay half of the standard amount on a specified date every two weeks and over the course of a year you’ll make 26 half-payments which are equivalent to 13 full payments. This can seem to many people a lot less painless than increasing your monthly home loan repayments.
You might be surprised how much of a difference just changing to fortnightly loan repayments can make.
For example: with a $400,000 home loan paid over a standard 30-year period using an average interest rate of 5.50% the monthly repayments would be $2,271 but by paying half that amount ever 2-weeks ($1,135 fortnightly) you will slice 5-years off your mortgage and save over $80,000.
You will be paying an additional two payments each year which equates to an extra $188 each month, but most people will hardly notice the difference.
Protect Your Repayments Too
A fortnightly repayments plan can be effective but only providing that you are able to continue to earn money to meet those repayments.
It is always recommended to have some form of mortgage protection cover or income cover. This helps provide some level of cover should you be unable to work and therefore your pay stops. These insurances are quite complex and can be expensive if not structured correctly and for that reason I would encourage you to seek help from myself or your insurance adviser.
The other way is to have some passive income – that is income that will continue if you are unable to work. Many people are now starting home businesses and internet businesses in an effort to create a passive income stream. Of course there are some scams out there but some are good too and with a little effort anyone can create an additional passive income.
Speak To Your Mortgage Broker
Make sure you speak to your mortgage broker.
We have mentioned quite briefly how this works, but if you are serious about paying your home loan off faster, then a mortgage broker can share a range of ideas that can certainly help you. Fortnightly loan repayments is a very simplistic thing to do and it will make a difference, but getting the right loan structure can make a massive difference and shave years off your mortgage.
There have been plenty of articles written that show that if set up wrong then there are no benefits and this is true. Maria Scott wrote an article which is on Good Returns back in 2007 and while that seems a long time ago now, the logic remains the same so it is worth reading that article.
Obviously, you don’t want to pay any more than absolutely necessary on your home loan and therefore looking at ways that will benefit you is a worthwhile thing to be spending some time at, but don’t forget to have a chat to a mortgage broker too.
We know how to structure home loans to ensure that you do pay yours off faster.