April 22, 2013
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.
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 loan principal off sooner each month and allows you to save on the interest calculated on the loan, the rewards will be minimal as 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 borrowers who budget accordingly.
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, it mean you make the equivalent of one extra monthly repayment each year.
Keep in mind that this method will see borrowers making more than two repayments during some months of the year. For this reason, it is very important to budget accordingly and to 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, such as myself, for details on how the repayments are calculated before committing to the loan.
Ultimately, to repay a home loan sooner, borrowers should be aiming to pay extra into the loan or offset account. Simply rounding up your weekly, fortnightly or monthly repayments to the nearest whole dollar could see you get home sooner.