Finance advice
Robert Stevens

Should I pay my loan fortnightly?

By Robert Stevens

If you want to pay off your mortgage faster, most lenders will let you in on the commonly used mechanism of making fortnightly payments. But is it the only option?

Blogger: Robert Stevens, co-director, Allied Investment Group

Realising fortnightly repayments allows you to slash up to tens of thousands of dollars from your mortgage payments, and cut the term of your loan by years. In terms of your disposable income, the difference isn’t much, but the advantage over the long term is.

How fortnightly repayments work:

Paying fortnightly allows you to squeeze in one extra repayment a year. For example, based on the monthly repayment of $2,000, after a year you will have paid $24,000 (12 x $2,000). To pay fortnightly, just split the monthly payment in half, making a fortnightly payment of $1,000. Given there are 26 fortnights in a year, you’ll pay $26,000 (26 x $1,000) or $2,000 more than if you were making repayments monthly, and therefore you’ll have less interest payable.

An important note that lenders don’t often mention is that if you do select fortnightly payments, they must be set up correctly. There are two ways this can be done: a true repayment option; and an inflated (or accelerated) repayment option. The inflated option is best as the interest cost is less, allowing you more of your repayment to go towards paying the principal off your loan, which means your mortgage is paid off sooner.

What about weekly repayments?

It’s the same outcome as fortnightly. Let’s assume your monthly payments are still $2,000. Divide this figure by 4 to get $500 per week. If you pay $500 per week, you’ll pay $26,000 by the end of the year (52 weeks x $500 = $26,000). So, based on those numbers you’ve still only made one additional monthly repayment by the end of the year. But you’re ahead for a different reason – the way your interest is charged.

Impact of small change/payment frequency:

If you can’t afford an extra monthly repayment a year, consider nominating the amount you want to pay with each repayment you make. This means topping up the minimum amount. Without stretching the budget too far, you can round up each payment to, say, the nearest $10 or $20. This is easier to remember and it counts as making an extra repayment. For example, if you have a mortgage of $300,000 with a 4.5 per cent interest rate, the monthly principal and interest repayment is $1,520.06 over a 30-year term. Use loose change to top this figure up by $20 to $1,540.06 each month to shave 10 months off the end of your mortgage term and save $7,741.57 in interest charges. Imagine how much more you could save and how much faster you’d repay your mortgage if you could round that number up even higher.

Use an offset account:

Another simple way to reduce the amount of interest you’re charged and pay off your mortgage faster is by linking your loan to a 100 per cent offset account. Every dollar you leave in your offset savings account actively reduces the amount of interest you pay on your mortgage. For example, $50,000 in a 100 per cent offset account on a home loan of $300,000 would see interest-only calculated on a balance of $250,000. At an interest rate of 4.5 per cent over 30 years, this could amount to a saving of $56,000 in interest, with six years cut from the home loan.

Mix it up and save:

Knowing different ways to reduce your mortgage provides the freedom to mix and match methods to suit your own budget. You can even put them all to good use and take advantage of the interest savings as you pay your home loan down faster.

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About the Blogger

Robert Stevens

Robert Stevens

Working over half his years in the finance and property industries, Robert Stevens is a certified practising accountant, financial planner and mortgage broker.

Starting as an Accountant in Adelaide, Robert then moved into financial services working for investment banks before becoming a co-founder of Allied Investment Group.

Robert loves helping people achieve their lifestyle goals and has helped hundreds of people tackle the complex world of investing and plan for comfortable retirement.

 

FROM THE WEB

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In this episode of the Smart Property Investment Show, Dominique Grubisa joins host Phil Tarrant to share her personal story which saw her hit rock bottom with excessive debt during the GFC.

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Dominique unpacks how, by relying on her background in law, she was able to overcome that debt and in doing so develop a unique investment strategy which she believes many can utilise today.

Dominique discusses distressed properties, and how she goes about finding them in order to buy property well below market value. She shares the process of identifying distressed properties as well as the controversy surrounding this buying method.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

3 big property investment myths busted open
5 steps to take on low-risk property developments
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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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To hear more about these services, make sure to tune into this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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    In this episode of Property Showcase, Michael Beresford joins editor of Wealth James Mitchell to unpack why recent political changes are not reason for concern for Australian investors.<\/p>\r\n

    In this episode, hear from\u00a0Michael\u00a0about:<\/p>\r\n

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Many investors who would have been successfully approved for finance last year are struggling now to either begin or continue their property investment journey because of the current financial climate.

In this episode of the Smart Property Investment Show, broker John Manciamelli and Momentum Media director Alex Whitlock joins host Tim Neary to discuss how APRA changes and the royal commission have resulted in a tighter lending economy and what that means for Australian investors.

They discuss what traps investors should avoid if they are trying to obtain finance, the four key growth drivers in a property market and unpacking trust structures while revealing one type of trust that you should miss.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

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AREAS MENTIONED:

Hobart
Bondi
Deception Bay

 

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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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Getting finance approved in this tightening lending environment

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