Size Matters

Yes, you heard me. Unfortunately for all you people out there with big huge ones, the truth is finally out. The smaller they are, the better. Mortgages that is; and there are no pills or herbs that can help you. On the upside, you can still benefit from a competitive interest rate and a well-structured repayment plan.

So how do you make your enlarged debt shrink sooner? First of all, jump into a cold shower, refresh yourself, and then log on to a comparison site like this one and do the research. There’s almost always a better interest rate to be found and it’s probably not going to be with one of the major banks.

Secondly, once you’ve found your desired financial partner, you’ll have the option of making weekly, fortnightly or monthly payments. Now here comes the maths…

Let’s take a mortgage of $300,000 to be paid off over 25 years at an interest rate of 6.00%. We can break it down into three repayment methods: monthly, fortnightly and weekly. (Those with high debt and low attention spans can skip straight to the results.)

Monthly:

Total Interest: $279,871.26
Payment: $1,932.90
Time (months): 300

There are fewer actual payments to be made, so the bank has to ask for higher repayments to cover the cost of the loan over the 25-year period.

Fortnightly:

Total Interest: $279,535.51
Payment: $891.59
Time (fortnights): 650

Now we’re looking slightly better on the interest payments front; however, those extra payments you’re making haven’t had much effect, because the bank averages your payments out over the 25-year period. You’re paying slightly less every fortnight but it’s made up by the fact that there are more actual repayment dates.

Weekly:

Total Interest: $279,391.57
Payment: $445.69
Frequency (fortnights): 1300

OK then, basically you’ll only save a total of $479.69 in interest payments over the life of your 25-year loan by choosing the weekly option. Big deal.

So here’s the secret: pay your mortgage using a bi-weekly method. The bank’s fortnightly method is still 26 payments a year like the bi-weekly, but it’s at a reduced rate so they keep you as a customer for the full 25 years. What you SHOULD be paying every fortnight is simply half of the monthly payment (otherwise known as bi-weekly), which in this case is $1932.90 divided by 2, or $966.45.

At $74.86 more than the fortnightly payment, the bi-weekly makes a big difference:

Bi-Weekly

Total Interest: $228,991.19
Payment: $966.45
Frequency (bi-weekly): 650

In effect, using the bi-weekly method, you’re making one extra repayment a year and you save $50,880.07 in interest payments over the life of the loan.

For all of you who’ve made it to the end of the article, you’ll shave 5 years off the life of your loan, bringing it to 20 years! Not a bad result for 2 minutes of reading.

Compare home loans with mozo.com.au

Size Matters was last modified: June 18, 2012 by Rhys Thomas

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