Previously in the “Back to Basics” series, I wrote about:
- Back to Basics: Recovering from Negative Returns
- Back to Basics: Asset, Liability, Equity
- Back to Basics: Investment Asset Classes
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 repayments = $908.70
Actual loan term = 25 years
Total interest payable = $172,610.22
Fortnightly repayments = $454.36
Actual loan term = 19 years
Total interest payable = $123,355
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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