Will fortnightly loan payments help pay off my loan faster?
This is a question many of Eightfold’s customers have – is it a myth or urban legend; or can this simple change really impact on the cost of your mortgage?
The answer quite simply is Yes!
But to understand why, you need to understand how mortgages work….
Loan repayments 101
Let’s start with the basics of any loan. A bank gives you money in return for being paid back the amount lent plus interest on top for providing this service.
Interest is calculated against the balance of the loan, generally daily. As the balance of the loan comes down, so to does the amount of interest you pay the bank.
Therefore the more you pay off your loan balance, the less interest you will have to pay the bank.
What comes out of your loan repayment?
When you make a loan payment; a certain amount of the money is allocated to:
- the principal – a portion of the amount borrowed
- Interest – amount accrued in the payment period
How do loans work in New Zealand
The most common form of repayment structure used by the banks in New Zealand is called a Table Loan. Under this repayment method, as the loan gets closer to maturity the less interest you pay and the more principal you repay.
Back to the question
So, now let’s get back to the fortnightly verses monthly argument. Let’s assume you have a mortgage of $100,000.00 at an interest rate of 5% over a 20-year repayment period. This would have monthly repayments of $659.00.
There are 12 months in a year, but due to some months being greater than 30 days, there are 26 fortnights in a year. If we simply divide the monthly payment of $659.00 by two we get $329.50 per fortnight. However by paying fortnightly you will make two additional payments per year which will mean that more money will be paid off the principal (loan balance) which will then reduce the amount of interest you pay.
- $659 x 12 = $7908
- $329.50 x 26 = $8567
The graphs below show the difference between monthly payments and fortnightly payments.
As you can see, with fortnightly payments, you could pay off your loan in 17.5 years vs 20 years and pay less interest back to the bank – Death to the mortgage!
Other ways you can pay your mortgage off quicker
As you have seen above the more money you can pay off the principal, the quicker you will be able to get rid of your mortgage. Some loan agreements allow you to pay an extra percentage each year, even if you’re on a fixed rate.
If you’d like help working out the best way to kill off your mortgage; give us a call today on
0800 881 886.