May 01, 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.
While most lenders offer the option to make more frequent repayments on a principal and interest home loans 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.
Borrowers will find 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.
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.
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.
Paying extra on your loan and building up a financial buffer now may also help safe-guard you against any changes to your financial situation, such as maternity leave, extended sick leave, in between jobs, and help you prepare for any future interest rate rises.
In the event that you do need to access these additional funds, some home loans will allow you the flexibility to withdraw any extra payments you have made towards the loan via a redraw facility. In this instance, it is a good idea to ask if there is a minimum redraw amount on your loan and if you will be charged a fee upon withdrawal. Keep in mind any withdraws from the loan will set you back in your quest to repay the loan sooner so be sure to weigh up the decision carefully.
There are many advantages to repaying your mortgage quickly. Not only will you own your home sooner, you can avoid hefty interest payments and may be able to access built up equity to use as a security to upgrade your home or purchase an investment property.