Should you be making fortnightly mortgage payments?
You might have heard that making fortnightly mortgage payments is better in the long run. You might have wondered exactly how that works, if you’re paying the same amount but in two installments. You might also wonder how much money it could possibly save.
Turns out, it can be quite a lot.
Let us explain. There are actually two reasons why you should look into paying your mortgage fortnightly instead of monthly.
1. You’ll make more payments in a year
This sounds a bit cheesy, but it’s about more than doubling your payments per year. You might think that if you change your payments to once per fortnight, you’ll just be paying half the amount twice as often. This isn’t quite true.
Crack out your calculator to follow along, if you like. If there are twelve months in a year, you’re probably making twelve payments per year. But if you divide 365 days by 14, you see that it comes to 26 (and a bit). By paying fortnightly, you’ll be making more payments per year, most likely without even noticing. This is because you’ll be paying on a given day every second week (like every second Wednesday), instead of the same day (i.e. the 17th) of the month, each month.
2. You’ll pay less interest
Interest is usually given as a percentage that will be charged annually, but that may not be how it’s calculated by your lender.
Check the fine print for your particular arrangement, but interest is usually calculated more often than once a year or once a month. It might be weekly, but sometimes it’s even daily. What does this matter? Well, the more often you make payments, the sooner your interest starts to go down.
It starts off slowly. With a mortgage of $500,000 and a 4.5% interest rate, repaying $2500 a month, there’s only $3 worth of difference after a month of repayments. However, after a year, there’s $3000 difference in the balance owing, and that’s just after one year (please note that $2500 of that is because of extra payments for fortnightly contributions).
To show the difference visually:
You can run the numbers yourself at https://moneysmart.gov.au/home-loans/mortgage-calculator to see how much of a difference fortnightly payments can make for your circumstances.
You might be wondering: if fortnightly is good, is weekly even better? The answer is: not really. The main benefit of paying fortnightly is making the extra payments per calendar year, not so much from the frequency of the payment (although it doesn’t hurt). All paying weekly does is slowly chip away at the compound interest — in the example shown in the diagram above, it might save you $500 over the course of the 26 years.
A word of caution though: discuss your desire to get ahead with fortnightly payments with your lender. It’s important that they calculate it correctly: if they just halve your monthly payments, you won’t wind up paying the extra. Don’t be afraid to take a calculator into the appointment with you and check their maths on the spot.
The only real downside is making sure that fortnightly payments work with your household finances — if you’re paid monthly, you might find yourself struggling between the second payment and next month’s payday. However, a commitment to making fortnightly payments instead of monthly payments, which means committing to that ‘extra’ month of payment per year, can shave thousands of dollars and years off your home loan. You probably won’t even notice the day-to-day financial difference, but you’ll sure notice it when you pay your home loan off five years early!