There is a lot of debate about whether the frequency of repayments will affect how quickly you pay off your home loan. But does it make a difference in reality?
Most lenders allow repayments to be setup either monthly, fortnightly or weekly. Some borrowers line up their repayments with when they are paid. It is the convenience of having the payment go out in line with your pay depositing that helps with budgeting and allows you to easily allocate your income across all of your bills.
General advice suggests that by choosing fortnightly or weekly repayments, you will actually make an extra repayment or two without even knowing it when compared to monthly repayments. In this way you pay extra and pay your home loan down quicker. But this may or may not be true depending on how the lender calculates the repayment amount.
Some lenders calculate fortnightly repayments by dividing your monthly repayment in half. You then repay that amount every two weeks. In effect this results in you actually paying the equivalent of one extra monthly repayment each year. Here is an example to illustrate. If your repayment is $1,000 per month then over the year this will add up to $12,000 for the 12 months. If the lender calculated your fortnightly repayment at $500 which is half the monthly repayment, then over 26 weeks in the year you would pay $13,000. This is a great way of getting ahead on your home loan.
Be careful though, only some lenders calculate the fortnightly repayment this way. Other lenders calculate fortnightly repayments so that you pay the same amount if you pay fortnightly or monthly. Using the example above, if you asked to change your repayments to fortnightly, the lender would divide your yearly $12,000 in repayment by 26 weeks to get a fortnightly repayment of $462. At this repayment you will pay the same amount and don't get any real benefit from paying fortnightly apart from some minor interest savings due to the repayment hitting your account sooner.
So don’t automatically assume that because you choose fortnightly or weekly repayments you will be ahead. Always check with your lender and ask which way they do the calculation. If in doubt, calculate the fortnightly amount yourself and tell them this is what you want it set to rather than going with the figure they give you. In the end the savings are achieved by paying extra, no matter now little. You can either set your repayments above the minimum or do one-off extra repayments on a regular basis.
State Custodians has a range of free online calculators available that can help you calculate your repayments and see which frequency will be most suitable for you. The 'Repayments and Savings Calculator' also allows you to factor in extra repayments so you can see how much of a difference any extra money put towards the loan will make. It can be found on the Repayments tab of our most popular home loans.
If you would like to speak to an expert about which loan repayment frequency would be best for you, give our Lending Specialist team a call on 13 72 62 or leave your details here and they will contact you.