Every little bit counts – especially when it comes to saving money on your mortgage when rates are rising.
So now I have your attention, it’s time to look at how changing one standard feature such as the frequency of repayments on your home loan can save you a surprising amount off your mortgage.
And it’s simple. Although many people opt to make monthly mortgage repayments because they can schedule it around the same time they are paid, it can actually make much more financial sense to switch to a fortnightly loan schedule instead.
That’s because if you currently make monthly repayments on your mortgage, you’re making 12 payments per year. But if you decided from now on to simply half those repayments and pay each fortnight instead, you would end up making 26 payments per year – which almost equates to one extra monthly repayment.
Now while that may not sound like much in isolation – when loans are routinely taken out over 20, 25 and 30 years, the compounding effect of that one extra repayment per year does add up significantly. And this can return some serious money over the long term back into your pocket.
To illustrate this in actual figures let’s look at the sums on an average $300,000 standard variable loan with a 25 year term and use a standard variable rate of 6.69% as an indicator.
CRUNCHING THE NUMBERS
Based on a rate of 6.69% – the monthly repayment on a $300,000 loan taken over 25 years is currently $2,061.38 and the total interest payable will be $318,414.71.
But if you switched that repayment schedule now from monthly to fortnightly, you could pay half the monthly repayment amount (i.e. $1030.69) and make the following savings:
Current Monthly Repayment: $ 2061.38
Monthly Repayment divided by two: $ 1030.69
THE END RESULT:
This represents an additional payment of $79.83 per fortnight over the minimum requirement and would save you $63,217.42 or 4 years and 3 months off your total loan term.
As you can see, by making one extra repayment per year on today’s rate you could save around $63,000 in interest on that loan –as well as paying out the loan more than four years early.
And at this point it’s a wise idea to point out that the savings effect can be magnified even further for you if rates continue to rise.
The other key benefit for many households who have already made the switch to fortnightly repayments is that it can also be easier to manage their cash flow and budget throughout the month – even if they continue to be paid a wage monthly.
This is because smaller repayments being made more regularly can give borrowers the flexibility they need to stagger other regular expenses throughout a month – minimising the overall impact on their cash flow.
So if you’re looking for a simple but effective way to shave some money off the total cost of your mortgage, consider changing your repayment schedule – it can end up making an enormous amount of cents for you.
Tags: Budget, Home Loans, Saving