When you take out a mortgage your lender will usually arrange for your home loan repayment to be deducted from your bank account monthly. However, you can ask for your mortgage to be taken out on a fortnightly basis. The benefits of paying your mortgage fortnightly are as follows:
An Extra Payment Per Year – There are 26 fortnights in a year, but only 12 months. Therefore, by paying your home loan fortnightly you’ll be making two extra repayments. So if you’re paying $2000 a month off your mortgage and you change your repayments to fortnightly, then you’ll be paying a $1000 every two weeks. This means that you are paying an extra $2000 off your home loan every year, and this extra repayment can save you considerably over the term of your loan.
Reduction in the Amount of Interest – Paying your home loan fortnightly will reduce the amount of interest that you pay to your lender over the term of your loan. For example, let’s say you have a loan for $320,000 at 5.75 percent over 25-years. If you pay this monthly, then you’ll have to repay $2,013.14 per month and you’ll repay $283,942.15. However, if you pay your mortgage fortnightly then you’ll reduce your mortgage by approximately $50,000 over the term of your loan.
Reduction of the Home Loan Term – Repaying your home loan fortnightly, instead of monthly can shave years off your home loan term. Let’s say you borrow $320,000 at 5.75 percent over 25-years. Paying an extra $2,000 off per year will reduce your home loan term by 3-years and 10-months.
But, before you change the frequency of your home loan repayments, make sure you know the facts, as not all lenders welcome extra payments.
Make Sure of the Facts Before Making the Switch
Before you make any changes to how you pay your mortgage, make sure you check how your lender structures your repayments. Some lenders will divide your monthly repayments by 2. This means that you are only making 24 payments per year, not 26. Whereas, other lenders will take out 26 payments per year.
You also need to check how your lender calculates interest and whether or not they charge you fees for accelerating your payments. Some lenders will only credit your fortnightly payments as occurring twice monthly, rather than 26 times a year. This means that while they are accepting earlier repayments from you they are not rewarding you for these early repayments, which means that essentially they are pocketing the interest.
Do you want to know more about making fortnightly home loan repayments? If so, then contact eChoice today.