Mortgage Reduction Strategies (3)

Method 3 – Make Weekly/Fortnightly Payments instead of Monthly: taken from http://www.financiallyfree.com.au/mortgage_reduction.htm

If you’re unable to use a 100% Offset or Home Equity Loan for your Mortgage Reduction, and you are currently making monthly payments, then switch your payments to fortnightly or weekly.

There are two fundamental reasons why weekly or fortnightly is better.

1. Because interest on loan accounts is calculated on the daily balance. As you’ll be reducing the balance of the loan more than monthly, you’re creating a slightly lower balance upon which the interest will be calculated. However, the advantage of doing this will be pretty minimal.

2. The main benefit achieved using this method is because you will be tricking yourself into making an additional annual monthly repayment, and the advantage of doing this is quite significant.

You see, if you are making monthly payments, you will be making 12 payments every year. But if you make fortnightly payments, you will not be making 24 annual payments but 26.

However, for this method to be of benefit, you need to set your new fortnightly payment amount at exactly half your current monthly payment.

Beware: if you approach your bank manager and tell him you wish to switch from monthly repayments to fortnightly, he/she may use the following calculation: (Mthly Pmt x 12) / 26

If you use the bank’s formula, there’ll be virtually no benefit to you.

Taking the example of Heath and Melissa (see Method 1 above), the table below shows how many years the use of Method 3 will reduce off their mortgage.

	P&I Loan with Monthly repayments	P&I Loan with Fortnightly repayments
Repayment Amount	$1032 p/mth	$516 p/fortnight
Time To Repay Mortgage	25 years	20yrs 8mths
Total Interest Payments to the Bank	$159,547	$127,600
Total Principal Payments Made	$150,000	$150,000
Total Repayments Made	$309,547	$277,608
Time Saved	Nil	4yrs 4mths
Interest Saved	Nil	$31,947

By simply paying 50% of their current monthly repayment fortnightly instead, they will save nearly $32,000 in interest and 4½ years off their loan.

Incidentally, this method proves to be far more effective in high interest rate times, and can slash many more years off your loan than with the current low rates we are experiencing at present.

Advertisement