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OK, sounds good, so prove it to me!
So how much of adifference does it REALLY make?
Monthly Vs Fortnightly Payment:
Example 1: $300,000.00 Mortgage fixed at 8% over 25 years, monthly repayments = $2315.45 per month.
The same loan set up with Forthnightly repayments of $1157.73 per fortnight (half the monthly amount) would be paid off in just 20 years!
Thats a saving of 5 years by swapping to fortnightly payments instead of monthly one! Don't believe it? Test it for yourself! Why the big difference you ask? Well there are two part. Firstly by chosing to pay fortnightly, you will actually make 2 extra payments per year. While this may not seem like much, it makes a big difference to your loan. Secondly, with mortgages the quicker you pay them off the better. When you pay monthly you whole loan accuumulates interest while that monthly payment is coming around, whereas if you pay fortnightly, you pay some of the debt off faster, meaning there is less to be charged interst on!
Small increases make big differences:
Example 2: $300,000.00 Mortgage fixed at 8% with fortnightly payments of $1100.00 would take 23 years to pay off
$300,000.00 Mortgage fixed at 8% with fortnightly payments of $1200.00 would take only 18.5 years to pay off! Thats a saving of almost 5 years off the loan for a repayment increase of less than 10%. When you get a small pay rise or you find your expenses have dropped, look at tacking a little extra onto that mortgage payment, you'll be shocked at how much time it'll save you.
A word of warning though, always check with your lender about any fees that might be chargeable on changing your repayments mid term.
Example 1: $300,000.00 Mortgage fixed at 8% over 25 years, monthly repayments = $2315.45 per month.
The same loan set up with Forthnightly repayments of $1157.73 per fortnight (half the monthly amount) would be paid off in just 20 years!
Thats a saving of 5 years by swapping to fortnightly payments instead of monthly one! Don't believe it? Test it for yourself! Why the big difference you ask? Well there are two part. Firstly by chosing to pay fortnightly, you will actually make 2 extra payments per year. While this may not seem like much, it makes a big difference to your loan. Secondly, with mortgages the quicker you pay them off the better. When you pay monthly you whole loan accuumulates interest while that monthly payment is coming around, whereas if you pay fortnightly, you pay some of the debt off faster, meaning there is less to be charged interst on!
Small increases make big differences:
Example 2: $300,000.00 Mortgage fixed at 8% with fortnightly payments of $1100.00 would take 23 years to pay off
$300,000.00 Mortgage fixed at 8% with fortnightly payments of $1200.00 would take only 18.5 years to pay off! Thats a saving of almost 5 years off the loan for a repayment increase of less than 10%. When you get a small pay rise or you find your expenses have dropped, look at tacking a little extra onto that mortgage payment, you'll be shocked at how much time it'll save you.
A word of warning though, always check with your lender about any fees that might be chargeable on changing your repayments mid term.
Lump Sum or higher repayments? Which is best?
So, you've got a bonus, commision, inheritance or minor lotter min and have some cash to spare. How do you get the best bang for your buck out of it? Pay a luimp sum off the mortgage or use it to fund higher repayments?
Well, after seeing what a difference a small increase in your repayments could make tot he overall term of the loan you might be tempted to go straight for the higher repayments, but don't be so fast! Lets see how the numbers actually play out:
Scenario: $300,000.00 loan, at 8% fixed with 2 years to run on the term, currently making payments of 1157.73 per fortninght exactly like the above example.
You've just come in to $5000 - what should you do with it?
Option1: The null proposition. Do nothing, Buy another house (if you live in the USA), blow it, have a holiday, a great time and a massive hangover. If you take this option you'll have some great memories, possibly bigger memory gaps, a damaged liver and at the end of your 2 year fixed term your mortgage will be: $286,598.25
Option2: Use the $5000 to find higher repayments for the next 2 years. There are 52 fortnights in 2 years, so you could afford to increse your repayments by $96.15 per fortnight without having to use anything but the $5K (in reality you'd also get some interest on this money as it's only being eroded slowly over time rather than spent all at once, so a $100 increase per fortnight would also be reasonable, but for the sake of this example lets not count on interest). By raising your repayments to $1253.88 per fortnight, at the end of your 2 year fixed term your mortgage would be: $281,141.38 - not bad and actually more than $5000 LESS than if you'd done nothing.
Option3: Put the lot on the mortgage in a single lump sum and keep repayments the same. This effectively drops the loan from $300,000 down to $295,000 and keeps your payments the same. end result at the end of your 2 year fixed: $280,700.61 - the best result! Why? The simple answer is that interest gets charged on the total amount of your debt every day. The quicker you pay down the debt, the less interest you pay and the more bang you get for ec=very mortgage payment buck!
So, in the final analysis a $5000 lump sum repayment actually nets you a $5897.64 mortgage reduction over 2 years.
A word of caution though, most lenders will charge you a fee for early repayment (You can find out a little more about this here) but they may not charge anything for increasing your repayments. If this is the case you may be better off increasing your payments and avoiding a fee. The fee could be the same or even more than the extra savings, so check with your broker or lender about any fees before making a decision.
Brokers are great, and in every case I've dealt with they work on commision paid by the lender, so they charge you NOTHING for their service while getting great deals for you. Don't have a broker? Google one up in the search box at the top right of the page.
Well, after seeing what a difference a small increase in your repayments could make tot he overall term of the loan you might be tempted to go straight for the higher repayments, but don't be so fast! Lets see how the numbers actually play out:
Scenario: $300,000.00 loan, at 8% fixed with 2 years to run on the term, currently making payments of 1157.73 per fortninght exactly like the above example.
You've just come in to $5000 - what should you do with it?
Option1: The null proposition. Do nothing, Buy another house (if you live in the USA), blow it, have a holiday, a great time and a massive hangover. If you take this option you'll have some great memories, possibly bigger memory gaps, a damaged liver and at the end of your 2 year fixed term your mortgage will be: $286,598.25
Option2: Use the $5000 to find higher repayments for the next 2 years. There are 52 fortnights in 2 years, so you could afford to increse your repayments by $96.15 per fortnight without having to use anything but the $5K (in reality you'd also get some interest on this money as it's only being eroded slowly over time rather than spent all at once, so a $100 increase per fortnight would also be reasonable, but for the sake of this example lets not count on interest). By raising your repayments to $1253.88 per fortnight, at the end of your 2 year fixed term your mortgage would be: $281,141.38 - not bad and actually more than $5000 LESS than if you'd done nothing.
Option3: Put the lot on the mortgage in a single lump sum and keep repayments the same. This effectively drops the loan from $300,000 down to $295,000 and keeps your payments the same. end result at the end of your 2 year fixed: $280,700.61 - the best result! Why? The simple answer is that interest gets charged on the total amount of your debt every day. The quicker you pay down the debt, the less interest you pay and the more bang you get for ec=very mortgage payment buck!
So, in the final analysis a $5000 lump sum repayment actually nets you a $5897.64 mortgage reduction over 2 years.
A word of caution though, most lenders will charge you a fee for early repayment (You can find out a little more about this here) but they may not charge anything for increasing your repayments. If this is the case you may be better off increasing your payments and avoiding a fee. The fee could be the same or even more than the extra savings, so check with your broker or lender about any fees before making a decision.
Brokers are great, and in every case I've dealt with they work on commision paid by the lender, so they charge you NOTHING for their service while getting great deals for you. Don't have a broker? Google one up in the search box at the top right of the page.