The two most common types of repayments are monthly and fortnightly, though some opt for weekly repayments. There are pros and cons to both, and you’ll need to carefully assess your financial situation before making a decision.
Which option is better? Let’s explore them more below.
Monthly repayments
Most people choose to pay their mortgage through monthly repayments. With monthly payments, you pay a set amount each month over the course of your loan term. For example, if you have a $500,000 mortgage with a 4% interest rate and a 30-year term, your monthly mortgage payment would be $2,387.
The primary advantage of monthly mortgage payments is convenience. Since most of our bills are due monthly, it’s easy to keep track of your mortgage payment and make sure it’s paid on time. Additionally, some lenders may only allow monthly payments, so it’s important to check with your lender before making a decision.
Fortnightly repayments
Fortnightly payments involve paying half of your monthly mortgage payment every two weeks. Using the same example above, your fortnightly mortgage payment would be $1,193.50.
By making fortnightly payments, you make 13 monthly payments per year instead of 12. This means that you’re paying off your principal faster, saving you thousands of dollars in interest over the life of your loan.
Using the same example as above again, if you were to make fortnightly payments instead of monthly payments, you would save $69,043 in interest over the life of your loan and pay off your mortgage four years earlier.
Another advantage of fortnightly payments is that they can help you build equity in your home faster. Since you’re paying off your principal faster, you’ll have more equity in your home in a shorter amount of time. This can be helpful if you plan to sell your home or use your home’s equity for a home equity loan or line of credit.
Let’s look at a case study:
John and Sarah are looking to take out a new home loan together, totalling $500,000 at a variable interest of 3.27% per year. After deliberations, they both decided that they would repay the principal and interest over the course of 30 years.
Using Lendstreet’s mortgage repayments calculator, they estimate their monthly repayment costs to be $2,182.52, excluding ongoing or annual fees.
However, if they switch to fortnightly repayments and instead pay $1,091.76 every two weeks, John and Sarah will pay off more on their loan by the end of the year and will pay less interest, saving significant money in the long term.
If John and Sarah stay on a fortnightly schedule, they would pay off their entire home loan nearly four years sooner and save $41,292 in interest (excluding fees and assuming their interest rate remained the same throughout the loan).
If they opted for weekly repayments of $545.38, they would save more than fortnightly repayments – around $41,660.
Clearly, fortnightly mortgage payments are a fantastic option for lenders looking to pay less interest in the long term and aiming to pay off their mortgage quicker.
Factors to consider before switching to fortnightly repayments:
While making fortnightly mortgage payments can be a great way to save money on interest and pay off your loan faster, it’s essential to consider a few things before making the switch.
- Your Budget: Switching to fortnightly payments means you’ll make more frequent payments, which could impact your monthly budget. Before making the switch, make sure you have enough income to cover the increased frequency of payments.
- Lender Policy: Not all lenders offer fortnightly payments, so you’ll need to check with your lender to see if this is an option. Some lenders may also charge additional fees for making more frequent payments, so you know of any potential costs before making the switch.
- Payment Timing: Making more frequent payments means you’ll need to keep track of payment due dates more closely. You could be hit with additional fees and penalties if you miss a payment.
- Other Debts: Consider your other debts and financial goals before switching to fortnightly payments. If you have high-interest debt, such as credit card debt, it may make more sense to pay it off first before focusing on your mortgage.
- Financial Goals: Consider your financial goals and whether switching to fortnightly payments aligns with them. If you plan to sell your home or refinance soon, it may not make sense to switch to fortnightly payments.
There are other ways you can pay off your mortgage faster:
- Make extra payments: You can make additional payments on your mortgage each month or make a lump sum payment each year. By paying more than the minimum amount due, you can reduce the interest you pay and pay off your loan faster.
- Refinance your mortgage: Refinancing your mortgage can help you get a lower interest rate and reduce your monthly payments. You can also choose a shorter loan term, such as a 15-year mortgage, to repay your loan faster.
- Offset your account: Another way to pay off your mortgage faster is by offsetting your account. This means you have a savings account linked to your mortgage account, and any money in your savings account is offset against your mortgage balance. As a result, you’ll pay less interest on your mortgage, and your savings will earn interest at the savings account rate.
- Avoid interest-only loans: If you have an interest-only loan, you’re only required to pay the interest each month, and the principal balance remains the same. As a result, you’ll end up paying more in interest over the life of the loan, and it will take longer to pay off your mortgage. If possible, avoid interest-only loans and opt for a principal and interest loan.
- Increase your mortgage payments: If your financial situation improves, you can increase your mortgage payments to pay off your loan faster. This can help you build equity in your home faster and save money on interest.
- Make lump sum payments: If you receive a windfall, such as a bonus or tax refund, you can use it to make a lump sum payment on your mortgage. This can help you pay off your loan faster and reduce the amount of interest you pay.
When considering these options, weighing the potential benefits against any costs, such as refinancing fees or prepayment penalties, is important. It’s also a good idea to consult with a financial advisor or mortgage specialist to help you make the best decision for your financial situation and goals. With the right strategy, you can repay your mortgage faster and achieve your financial goals sooner.
Need a mortgage broker? Consider Lendstreet.
At Lendstreet, we’re committed to helping you find the right loan that meets your needs. If you require a mortgage broker, we’re here to give you expert advice to guide you through the home loan process.
Contact a mortgage broker today to discuss your future home.
What’s the difference between principal and interest repayments?
A principal payment is made to repay the original amount of money borrowed to pay for a property. In comparison, an interest payment is a fee you pay when taking out a mortgage. This is calculated as an annual percentage of the home loan.
Principal and interest payments both contribute to paying off your mortgage.
How does paying fortnightly work?
When you make fortnightly mortgage payments, you make 26 payments yearly, or 13 full payments. Instead of making one full payment per month, you’ll make half of your monthly payment every two weeks. This means you’ll make 26 half payments, which add up to 13 full payments per year.
How much can I save by paying fortnightly?
The amount you can save by paying fortnightly depends on your loan amount, interest rate, and loan term. However, as a general rule, paying fortnightly can help you pay off your mortgage several years earlier and save thousands of dollars in interest over the life of your loan.
