Changing your home loan repayment schedule from monthly to fortnightly can save you a small fortune by helping your pay your mortgage off faster.
My mates at Compare the Market (where I am Economics Director) crunched the numbers and found that a person with a $600,000 loan could save over $160,000 in interest over the life of the loan and cut down their loan term by over five years just by paying their mortgage fortnightly instead of monthly.
The reason is that when people pay their monthly mortgage payment at the end of the month, the balance has been higher throughout the month. The amount of interest you pay in any month is calculated based on how much you owe on each day of the month.
So, when your repayments are made fortnightly, it means that your loan balance reduces through the month and so does your interest bill. This simple hack could save you tens of thousands of dollars and shave years off your loan – but you’ve got to do it right.
Source: Compare the Market
Be sure to pay half of the monthly rate each fortnight
You’ll need to tell your bank that you want to pay half of your monthly repayments fortnightly. Because if you simply switch to a fortnightly repayment plan, this could be a smaller payment amount, and then this hack might not work for you.
For example, if your monthly payments are $3,694 you will want to pay $1,847 per fortnight. This means you’ll be paying an extra $3,694 each year, which will cut down your principal and interest owed to the bank.
You’re not just paying it back early; you’re paying slightly more. I doubt paying extra into the mortgage is a top priority for many Australian households, but for those who have the means to do so, it is worth considering.
The more you can contribute now, the bigger and better the safety net will be to break your fall if you end up needing some support down the track.
Get Kochie’s weekly newsletter delivered straight to your inbox! Follow Your Money & Your Life on Facebook, Twitter and Instagram.
Read this next:
Trending
Sorry. No data so far.