Back to Basics: Paying Mortgage MONTHLY Vs. Paying Mortgage FORTNIGHTLY

Previously in the “Back to Basics” series, I wrote about:

Today let’s look at the difference between paying off your mortgage monthly versus paying off your mortgage fortnightly.

This concept can also work in the receiving money context (i.e. when you receive rental payments as a property investor, salary, and etc.). Read on and you’ll understand.

First question. Do you think that there’s any difference at all between paying once a month and paying every two weeks? There is a difference. A huge difference actually. Changing your payment method to the fortnightly basis payment method can pretty much change your life.

This little “strategy” is something that is often overlooked by many. It is in fact a proven method to reduce your mortgage faster by cheating yourself without feeling much pain in the pockets. Of course, this depends on the individuals as well. If the person is still very much unable to control his/her financial situation (i.e. struggling with having to set aside money for savings and investments), then there’s no point also.

Anyway, back to the discussion. Say your mortgage repayments every single month is $100.

If you pay the repayments once a month, by the end of the year, the total sum for 12 payments is $1,200, am I right?

However, if you adopt the pay-every-fortnight method, that means, instead of paying $100 per month, you are now paying $50 for every two weeks.

What’s the difference you ask?

Ok, how many months are there in a year? 12.

How many fortnights are there in a year? 26.

Now, try multiplying $50 by 26 fortnights.

…………….
………….
………..
………
……
….

You’ll get a figure of $1,300.

You are now effectively making one extra month worth of payment every single year! Imagine the number of years that you can shave off from your mortgage with this method. Imagine also the amount of money saved from interest payments!

Let’s have a look at an example.

Say you’ve taken a $100,000 loan at an interest rate of 10%. The loan term is 25 years.

Monthly-basis

Monthly repayments = $908.70
Actual loan term = 25 years
Total interest payable = $172,610.22

Fortnightly-basis

Fortnightly repayments = $454.36
Actual loan term = 19 years
Total interest payable = $123,355

Conclusion

Time saved = 6 years
Interest saved = $49,246

*if the calculations are wrong, do tell me.

Do the calculations yourself by using the online calculators here and here.

Remember to check with your bank or financial institutions first on whether or not they allow fortnightly payments. Check also whether or not they implement a penalty if you finish off your mortgage early.

The most important of all, check with your financial advisers whether this method is suitable under your circumstances.

Talking about fortnightly repayments, there’s no wonder that here in Australia, many companies and individuals prefer that method. In the context of property investing for example, rentals are calculated on a weekly basis, not on monthly basis. That means, effectively, they’ll be getting an extra month of rent per year. Certain membership-based companies also adopt this method. Some of them claimed that this is due to their computer system, administration practices, and bla bla bla but the real reason is so that they can get an extra month worth of revenue off you!

Banks and financial institutions on the other hand prefer you to pay on a monthly basis. Why? So that you need a longer period to pay them off which equates to more interests. How smart.

Okay, I hope you do take some considerations about implementing this simple strategy. Do research a bit more and determine whether it is feasible under your current situation.

Till next time folks!

Disclaimer: This article is not a specific nor general advice on managing or investing your money. This article does not constitute a recommendation nor does it take into account your investment objectives, financial situation nor particular needs.

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Other related posts:

CFD Trading : An Introduction
CFD Trading/Share Trading : Setting Stop Loss
Investing & Trading. What’s the difference?
CFD Trading/Share Trading : The 2% Rule
Do What You Think is Right
What is Financial Freedom
Passive Income Exceeding Expenses

About nadlique

This blog is about the journey of a 28-year-old Malaysian towards financial freedom. This blog was started back when the blogger was 21 years old. However, his journey towards financial freedom had begun way before that. Materials such as investing, business, entrepreneurship, equities, and real estate are presented. The author also posts his thoughts and observations on life in general.

Comments

  1. brilliant 🙂

  2. hi.. im not a trader or a seller or anything of that sort. Im just like u, someone trying to not lose my hard earned money. Malaysia has a really primitive unit trust/mutual fund industry. Theres not such concept of low cost/ tracker funds available.

    Just wondered if u actually work for those unit trust ppl. Cos i think they really make too much of our money. I mean, for the job the do(selling unit trust) they expect6-7% of ur cash? U must be joking!

  3. hello there 🙂

    I have to agree with your, Malaysia does have a rather primitive mutual funds’ industry. The costs involved investing in unit trust are preposterous. Even though the fees have been lowered now, I still consider them to be expensive.

    I really wish that they could abolish the middlemen involved in the industry. Even if that’s not possible, at least give the customers a lot of rebates or discounts.

    In other words, somebody needs to go in and revolutionise the industry.

    Here in Australia for example, they rebate you back most the initial charges. They only take a small cut.

    Also, by the looks of the global economy right now, most unit trust investors may be looking at a year or more of negative returns.

    P.S. I don’t sell unit trust funds.

  4. not sure if our loan repayment here allows fortnightly repayments.. since they stand to “lose” so much.. the other thing I am always very curious is if we were to repay our car loan earlier (say we have one more year of repayment to pay and we decided to repay everything one shot), would the bank accept the repayment of the balance of loan and forget about the interest for that final year (which I think is logical) or do they still charge some interest (which I think they do to cover their “lost”)… any idea?

  5. I think I read somewhere that certain institutions do allow fortnightly repayments. Have to find out again.

    Car loans, if I’m not mistaken, interests will only be charged on the outstanding balance. I don’t think it matters if you still have one more year left. If you pay off the whole thing now for example, then loan settled. Again, you might want to make sure whether this is correct or not 😉

    The banking system can be a bit of a “pening kepala” at times.

  6. No wonder the banks love people who pay every month instead of fortnightly.

    I never considered at all paying anything every two weeks, always monthly.

    I learned something here and gonna give it a try, thanks!

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