A little considered but valuable question: what box do I tick when I get a loan – paying weekly, fortnightly, or monthly? Without thinking about it much, you would assume that it doesn’t make a difference when you pay your mortgage as long as it is consistent. But a knowledge of the calendar year might spark your maths skills and help you realise that there is a very clear benefit to paying your mortgage off either weekly or fortnightly.
Paying a mortgage off monthly is the most common way people approach their repayments. It might make it easier for people to organise their finances this way, with a single payment being easy to manage and account for. But you can save on both the amount you pay over the length of the loan and how long it takes you to service the loan by making more regular payments, either weekly or fortnightly.
The power of the calendar year
This is how it works, plain and simple: there are 12 months in a year. So if you pay your mortgage off monthly, then you pay twelve times in a year. For a $500,000 home with a fixed rate of 3.5%, that is twelve payments of $2,245 per month over 30 years.
Now if you pay fortnightly, you might assume you would be paying twice a month, so that’s 24 times in a year, right? Wrong! There are 52 weeks in a year so you would be paying off your mortgage over 26 fortnights. That’s an extra 1 month of repayments in a year when you pay by fortnight compared to monthly repayments. The same goes for paying by week, as you will be paying off those extra four weeks that you wouldn’t pay for if you paid 12 monthly repayments.
What will you save?
For that $500,000 home on 3.5%, your fortnightly repayments will be $1122.50. If you had paid monthly, then in a year you will pay off $26,940 (Monthly repayment of $2,245 x 12). If you pay fortnightly, your repayment by the end of the year will be $29,185 (Fortnightly payment of $1122.50 x 26). That means in a year you will pay off $2,245 more of your loan if you paid fortnightly than monthly.
If you pay monthly, than your overall interest payments on your $500,000 loan will be $308,280 (more than double the original mortgage price!). It is therefore in your interest to repay the loan back as soon as possible to reduce the effect of the interest rates on your repayments. If you pay fortnightly, you will only pay $263,735 in interest, a saving of $44,544 over the length of your loan. On top of this, you will pay off your loan 3 years and 10 months sooner. Paying weekly makes a marginal difference to your overall interest repayments ($257) and you pay the loan off in the same amount of time as if paying fortnightly, so either is a great option.
Note: make sure your lender does not organise your fortnightly payments so that it is the annual repayment divided by 26 fortnights. You will still save some money on interest repayments, but not as much.
Pros vs. Cons
Beyond the savings you make to your interest payments and time it takes you to pay off the loan when paying fortnightly/weekly, there may be benefits to this system if it suits how you prefer to run your finances.
A monthly payment may be favourable to those who are paid their salary monthly and want their payments to be automatic on pay day. This means they do not have to think about the mortgage but can run their budget with what is left over.
Paying fortnightly or weekly can still be set up automatically if you create a separate account for your mortgage and organise your salary to be automatically transferred to this account when you a paid, and then organise another automatic payment of your mortgage from that account.
Those who are paid weekly may prefer paying weekly, so that they do not risk spending that money that is needed for their loan repayments, while those who are paid irregularly (freelancers etc.) may prefer monthly repayments, as they can more easily organise their finances around a single point rather than having to constantly shift things to cater to a weekly or fortnightly payment.
However, it is clear from the interest savings and the time it takes you to service the loan that paying off your mortgage weekly or fortnightly is the preferred option.