Finding the right home can take weeks and months of legwork and online research. Once you’ve got your house and the home loan to go with it, your monthly mortgage repayments are pre-determined for the next 25 to 30 years. But the faster you reduce your loan balance, the quicker you can own your home debt-free, and that’s the ultimate goal for most homebuyers.
While it’s easy to settle into auto-pilot mode, timing your monthly repayments with your monthly salary, you could be missing out on major savings. If your goal is to reduce the amount of interest payable on your loan and pay down your loan sooner, you need to know the real benefits of making weekly or fortnightly payments that some banks may not bother telling you.
Interest is calculated on the daily loan balance.
The interest may be charged to your loan account once a month, but it’s calculated daily on the closing loan balance. Making frequent repayments puts you at an advantage, reducing your loan balance and the interest charged.
You’re not locked into paying monthly repayments.
In fact, making a simple adjustment to weekly or fortnightly repayments could reduce your loan term. You can modify your repayments easily using direct debit from your nominated account. That way you don’t have to worry about forgetting to make a repayment every week or alternate week, and your scheduled repayments are taken care of automatically.
The difference frequent repayments can make.
The trick to saving on interest and reducing your loan term comes down to how you calculate these repayments.
Halving your monthly repayment and paying it every two weeks you could save money on interest because you would pay off your loan faster. That’s because there are 26 fortnights in a year so paying fortnightly works out to the equivalent of 13 monthly repayments rather than 12. Alternatively, you could divide your monthly repayment by four and pay weekly, saving you more in interest.
Paying more, more frequently, is the key.
It’s worth checking how your lender goes about calculating your weekly or fortnightly repayments. Some lenders multiply the monthly repayments by 12 and then divide it by 26 to give you a fortnightly amount or use the same logic to calculate weekly repayments. This may not reduce your loan so fast and goes against the benefits of fortnightly or weekly repayments.
That’s why putting in a little extra every time can add up over time. Even a few extra dollars paid into your home loan every week can make a substantial difference over time. We have lots more tips to help you pay off your loan faster and help you find the right loan to get you started.
Mortgage House
At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.
But don’t worry, we can help with that.
If you’re thinking of buying a home, you can contact us for information about the best options for you when it comes to your mortgage.
