Will Fortnightly Payments Reduce My Mortgage Faster Than Paying Monthly?
We thought we would take the time to address a question we are often asked in relation to payment frequency on our downloadable investment calculators: 'will paying fortnightly mortgage payments reduce my mortgage faster than paying monthly?'
There is a common misperception in regards to loan payment frequencies; many believe that paying fortnightly or weekly will result in the loan being paid down in less time than if payments are made monthly. You might hear a mortgage broker talk you into choosing fortnightly payments and the huge benefits – benefits that are hopefully enough to justify any fees they charge.
This is true ONLY when the monthly payment for the loan term is divided by 2 and paid fortnightly. However paying fortnightly for a 25 year loan term will still result in the loan being paid down in 25 years! The same is true for any length of loan term.
Why won't the loan reduce any faster?
Let’s look at an example:
Sarah goes to the bank and wants to get a principal and interest home loan. The bank says that they will give her a loan with a 30 year term and an 8% p.a. interest rate. They ask whether Sarah would like to pay monthly or fortnightly.
If Sarah answers monthly:
The bank will calculate the mortgage payment that is payable each month that will result in the principal being paid down in 30 years. Sarah will make 12 monthly payments throughout the year.
If Sarah answers fortnightly:
The bank will do the exact same thing but for a fortnightly payment.
If Sarah makes half the monthly payment every fortnight:
This is where things will change. There are 26 fortnights in a year. Sarah will make 26 fortnightly payments of half of the monthly payment. She will in effect have made 13 monthly payments.
So the idea that fortnightly repayments will reduce your loan faster is only when you make an extra monthly payment each year – which you could just do anyway.
Fortnightly Vs Monthly Payments In General
The real reason fortnightly payments are better than monthly payments is because you are paying the bank the principal owing sooner than paying monthly and therefore you will have less interest payable.