Co-author: Bruce Pitchers
How often can you make repayments on home loans?
Most home loans have a monthly repayment scheduled by default. But most home loans also offer the option to make repayments weekly, fortnightly, or monthly. Still other providers allow borrowers to make repayments more or less frequently, with options such as daily, quarterly, semi-annually, or even annually.
Most mortgage calculators allow you to enter in your payment frequency of choice, including Canstar’s, which you can access by clicking here! But if you crunch the numbers something very strange happens.
For example, if you have a $500,000 mortgage at 4% over 20 years, if you pay monthly the amount of interest you’ll pay over the term of the loan is $227,176. If you pay weekly, you’ll pay $226,569 … that’s a whopping saving of, drum roll please:
$607 over 20 years or $30.35 per annum!
So what’s going on? What about the advice to pay weekly or fortnightly, instead of monthly? And where did the thousands of dollars of saved interest repayments go? The answer, my friend, is blowing through the finer details of how much you’re actually repaying.
Weekly vs monthly mortgage repayments: it’s in the maths
When banks, and most mortgage calculators, work out the difference between monthly and weekly repayments, they take your total annual repayments and divide them by either 12, for monthly, or 52 for weekly.
Working with our example above – $500,000 mortgage at 4% over 20 years:
- Weekly payments of $699 x 52 week = $36,348 p/a
- Monthly repayments of $3030 x 12 months = $36,360 p/a
In essence, you’re paying the same amount, just divided differently. You pay a fraction more, but not much, hence the paltry saving of $607 over two decades.
To reduce your interest charges, you’ve got to pay off more of your mortgage more frequently! And this is the crux of the weekly/monthly payment argument. To achieve the savings promised by those promoting weekly or fortnightly payments, you’ve got to use the monthly payment of $3030 above as your starting point, not the annual total:
- Monthly repayments = $3030
- Monthly repayment ($3030) divided by 4 = $757.50 per week
- Annual total ($757.50 per week x 52) = $39,390
Using our example, by paying the extra $58.50 per week you end up paying an extra month’s worth of repayments per year. Over the course of the mortgage, it shaves two years off the loan’s duration, and the total amount of interest paid shrinks to $198,005. That’s a saving of a whopping $29,171!
The bottom line is that there’s no magic formula to paying off your mortgage faster and paying less interest. As with all loans, the more repayments you make, the faster your debt will evaporate.
Is it easier to make weekly, fortnightly, or monthly repayments?
Thanks to automatic payments, it’s easy to schedule mortgage repayments from a transaction account, whether monthly, weekly or fortnightly. As we’ve shown above, if you want to save the big money on interest payments, you need to pay more than your minimum repayments. Of course, whether this is something you can afford is a matter to consider when writing your budget.
How do you switch from monthly to weekly repayments?
Firstly, you’ll need to check whether your lender offers the payment frequency you desire (e.g. weekly, fortnightly, etc.). Always confirm this with your lender before assuming you can switch!
Secondly, call your bank – or use its online banking portal if you manage your loan online – to apply to switch your repayment frequency. Ask them whether they calculate fortnightly payments as half a monthly payment, paid fortnightly (which saves you interest), or as your total annual amount divided by 26 fortnights (no interest savings). Also be sure to ask them whether any additional fees apply if you choose to make repayments more frequently.
Thirdly, while you’ve got the bank on the phone, why not ask for a lower interest rate? Chances are you’re switching repayment frequency because you want to save money, so there’s no time like the present to negotiate a better rate as well.
Here’s a bright idea – check out our top tips for how to negotiate on home loan rates
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