Australian homeowners could save tens of thousands of dollars and pay off their loan faster by making a small change to their repayments.
Compare the Market crunched the numbers and found a person with a $600,000 loan could save over $160,000 in interest over the life of the loan and cut down their loan term by over five years if they were to switch to fortnightly payments instead of monthly.
Compare the Market Economic Director David Koch said that when people pay their monthly mortgage payment at the end of the month, the balance has been higher throughout the month.
“The amount of interest you pay in any month is calculated based on how much you owe on each day of the month,” Mr Koch said.
“So, when your repayments are made fortnightly, it means that your loan balance reduces through the month and so does your interest bill.
“This simple hack could save you tens of thousands of dollars and shave years off your loan – but you’ve got to do it right”.
| Difference in monthly and fortnightly mortgage repayments for a $600K loan | ||
|---|---|---|
| Repayments | $3,694 monthly | $1,847 fortnightly |
| Total interest paid | $729,949 | $567,907 |
| Time to repay loan | 30 years | 24 years 4 months |
| Variable P&I interest rate | 6.25% | 6.25% |
| Calculations are based on a $600,000 loan with a variable interest rate of 6.25%. The total interest paid assumes there are no changes in the cash rate. Fortnightly repayments were calculated by dividing monthly repayments by two. | ||
“You’ll need to tell your bank that you want to pay half of your monthly repayments fortnightly,” Mr Koch said.
“Because if you simply switch to a fortnightly repayment plan, this could be a smaller payment amount, and then this hack might not work for you.
“For example, if your monthly payments are $3,694 you will want to pay $1,847 per fortnight.
“This means you’ll be paying an extra $3,694 each year, which will cut down your principal and interest owed to the bank”.
Mr Koch said you’re not just paying slightly more; you’re paying it back early.
“I doubt paying extra into your mortgage is a top priority for many Australian households, but for those who have the means to do so, it is worth considering,” Mr Koch said.
“The more you can contribute now, the bigger and better the safety net will be to break your fall if you end up needing some support down the track”.
For more information, please contact:
Natasha Innes | 0416 705 514 | [email protected]
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