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Fortnightly Payments... Bargain or Rip Off?

Creating fortnightly rather than monthly payments indicates you could significantly reduce the term and cost of your mortgage over the long term. How? It’s easy. Everyone knows there are only 12 months in a year, but did you understand there are 26 fortnights? If you divide your monthly payment in two and make payments every fortnight, this is the equivalent of Making 13 monthly payments every year.

Some experts call this eating the elephant one bite at a time. Realizing the switch to fortnightly repayments means that your ‘bites’ are small affordable reimbursements that can be achieved and assist to completing something much larger, in this case - paying off your home loan.

In fact, what if you could efficaciously add weeks to a year? The good news is that it’s much easier than you expect. Anything it takes is this one small exchange that can have a massive impact on your finances: simply switch your repayments from monthly to a fortnightly basis. If your salary is being paid fortnightly this is an easy choice, if you are being paid monthly then you may need to consider some adjustments to your budget.

In a way, arranging fortnightly mortgage repayments is like strained saving, as the repayments are produced from your bank report previously you have an opportunity to consume that money on other costs, also being aware that you are making an extra month’s payment each year through fortnightly payments will give you peace of mind that you’re doing as much as you can to pay off your home loan as soon as possible.

So, if fortnightly repayments equate to an extra month’s payment over a year, then weekly payments have to be even better, correct? In reality, paying your mortgage in weekly installments may help marginally but it won’t realize much more in savings. The most noticeable discrepancy you can execute is to change from monthly to fortnightly repayments.

In addition, the extra repayment fortnightly repayments will also reduce the interest charged on your loan for that particular month thus further reducing more of the principal figure than would normally be done. These little savings over a period of time can significantly add up.

Over the long term, realizing fortnightly repayments means that you could slash up to tens of thousands of dollars from your mortgage payments, and cut the term of your loan by several years.

In terms of your disposable income, the difference would not be painfully obvious, but in the long term the advantages are immense.

A very important point to note which you are not very often told about is if you do select fortnightly payments is that it is set up correctly.

It has become accepted wisdom among financial advisers and commentators to recommend fortnightly mortgage payments as a way to save interest.  Lenders do not automatically set them up to save money for customers. Many lenders calculate repayments fortnightly over the period of the loan. This amount really will not save you anything.

For example:
A mortgage of $250,000 at 8% over 30 years will cost $1834 per month and interest over the term of the loan will be $410,000. If however you pay $917 per fortnight (half of the monthly equivalent) you will repay your mortgage off 7 years earlier and save $113,000 in interest.

However if the lender calculates the repayments fortnightly based on paying the same amount per annum, as if you paid monthly, this would result in repayments of $846 per fortnight. Despite paying fortnightly you still pay your loan off over 30 years and only save $284.

To ensure a true saving you should be paying a figure half your monthly payments to ensure you save the amounts explained above.  By paying half of your monthly payment on a fortnightly basis you end up making two extra payments a year. So, on a $100,000 home loan, you can cut nearly five years off your loan saving about $28,000 or 23% in interest.”

A banking spokesperson claimed that it was misleading to state that there were two methods for calculating fortnightly payments because borrowers usually aligned their payments with salary frequency and at times preferred to still pay the minimum stretching their repayments to the full loan term.  It is however prudent for you to understand all the issues surrounding this topic.

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