April 17, 2013
Mortgage holders are often told that making more frequent repayments will help to repay a home loan sooner. However, the time it takes you to pay back the loan can ultimately come down to how your lender calculates the repayments, according to national mortgage broker, Mortgage Choice.
While most lenders offer the option to make more frequent repayments on a principal and interest home loan by way of weekly or fortnightly instalments, there are different ways in which lenders calculate loan repayments. It is worth noting that some methods are more beneficial than others.
Mortgage Choice spokesperson, Belinda Williamson said, “It is possible for borrowers to make big savings on their home loan by making weekly or fortnightly rather than monthly loan repayments, but it really comes down to the way in which their lender calculates the repayment amount.”
Ms Williamson explained that some lenders calculate weekly loan repayments by dividing the annual repayment amount (12 x monthly repayments) by 52 weeks, which is often referred to as ‘true' weekly repayments. The same principle applies to ‘true' fortnightly repayments, whereby the annual repayment amount is divided by 26 fortnights.
“While making ‘true' weekly or fortnightly repayments will help to pay part of the principal loan amount off sooner each month and allow you to save on the interest calculated on the loan, the rewards will be minimal. This is because borrowers won't be paying any extra off the principal loan amount when compared to monthly loan repayments,” said Ms Williamson.
“Other lenders use a simpler method of calculating weekly or fortnightly repayments that may be more beneficial to some borrowers. That is, lenders calculate weekly or fortnightly repayments by dividing the monthly repayment by four to calculate weekly repayments or by two to calculate fortnightly repayments.
“This repayment method can have a greater impact on your repayment strategy as not only are you paying more frequently due to the varying length of months, but you also make the equivalent of one extra monthly repayment each year.
“Keep in mind that this method will see you making more than two repayments during some months of the year. For this reason, it is very important to budget accordingly, and you may even consider nominating your repayment dates to suit your pay cycle.
“Also note that not all lenders offer this repayment method, so it is a good idea to ask your lender or mortgage broker for details on how the repayments are calculated before committing to the loan.”
Ms Williamson concluded by encouraging borrowers to make savings on their home loan when possible.
“Ultimately, to repay a home loan sooner, you should be aiming to pay extra into your loan or offset account, if you have one. Simply rounding up your weekly, fortnightly or monthly repayments to the nearest whole dollar could see you living mortgage-free sooner,” said Ms Williamson.
For further information or to arrange an interview, please contact:
Mortgage Choice Corporate Affairs
(02) 8907 0472 / 0407 416 124
(02) 9018 8603 / 0412 550 004
This article is for general information purposes only. It has been prepared without considering your objectives, financial situation or needs. You should, before acting on the advice, consider its appropriateness to your circumstances.