Whether you've recently been approved for first home buyer loan or simply reviewing your current home loan to see how you can save a little extra, the frequency of you're regular repayments can make a big difference to how much you pay in interest over time.
Since there are 12 months in a year, but 26 fortnights and 52 weeks, fortnightly or weekly payments can help you make an extra month’s worth of monthly repayments each year without you even realising it.
Paying weekly or fortnightly instead will save money in the long run because you end up paying an additional month per year. This means that paying weekly or fortnightly can substantially reduce the number of years it takes to pay off your home loan.
As an example, imagine you take out a $400,000 loan for 30 years at an interest rate of 3.64%. Your monthly payments will be $1,827.58. Over the duration of the loan, the total amount you repay will be $657,931 including both principal and interest.
If you switch from monthly to fortnightly repayments, you’ll be paying an extra $1,827.58 each year. This will cut the time it takes to repay your loan by four years and ten months. You’ll also save $38,145 on interest charges.
Paying your mortgage weekly is another option for borrowers. When you choose this route you’ll be paying $456.90 on a weekly basis (using the example above).
You’ll also reduce your mortgage by four years because you will be making fifty-two weekly repayments, instead of forty-eight, resulting in effectively making an additional month of repayment per year.
Weekly payments pay down your mortgage the fastest of the three options. But compared to paying fortnightly, you’ll be saving an additional $222 on interest charges.
|$400,000 loan w/ 3.64% interest rate||Monthly||Fortnighlty||Weekly|
|Interest payable over 30 years loan term||$257,931||$219,786||$219,564|
|Total loan cost||$657,931||$619,786||$619,564|
|Time saved repaying loan||n/a||4 years||4 years|
Interest on our home loans is calculated daily and then charged to you at the end of each month. We take the outstanding loan amount at the end of each business day and multiply it by the interest rate that applies to your loan. Then we divide that amount by 365 days (or 366 in a leap year) and multiply the daily amount by the payment period.
The interest rate affects the amount you will be required to repay over the life of your home loan. If you have a variable rate home loan, when interest rates rise it will increase your mortgage repayments.
In contrast, if interest rates fall your repayments will be lower. If you choose a fixed-rate loan, you do not have to worry about changes in interest rates until the fixed period is over.
At loans.com.au we know that your circumstances may change throughout the duration of your home loan. When this happens you can chat to us to set up more frequent payments, add lump sum payments or even discuss getting an offset sub-account.
Additional repayments into a fixed home loan are allowed and are up to $10,000 per annum. There is no redraw or offset sub-account available unless there is a variable split.
The amount in your offset sub-account is offset against your loan balance and interest is only charged on the difference.
For example, if your loan amount is $350,000 and you have $50,000 in your offset sub-account, then you will only be charged interest on $300,000. Because you pay less in interest, an offset sub-account can help you pay off your mortgage sooner while still having the ability to access the money you have in your account.
Using your offset sub-account to reduce the amount of interest you pay on your home loan is like earning high interest that’s tax free. In most cases, your home loan interest rate is going to be higher than your savings account interest rate, so you’re in front when you use your offset sub-account. Here are two tips to maximise your offset sub-account:
Every dollar in offset sub-account saves you money every day. So to boost your savings, have your salary paid directly into your offset sub-account.
If you're saving for a holiday, new car or even school fees, you can use those savings to help pay off your home loan faster. Deposit them in your offset sub-account until you need the money so you will pay less interest.
Generally, the more frequent the payments you make, the more you will save in interest over the term of your mortgage. Whether you choose monthly, fortnightly, or weekly repayments be sure ask your lender for all the calculations before you make a decision.
You can check out our home loan payment calculator to get a rough idea how much your repayments will be. Or, if you’re ready to get started with an offset sub-account, chat to our team of lending specialists today on how you could save thousands.