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Why ticking the wrong box could cost you $80K

Laine Gordon avatar
Laine Gordon
- 3 min read
Why ticking the wrong box could cost you $80K

If you’ve got a home loan or are considering borrowing to buy property this year then stay tuned, because one simple piece of advice for the mortgage application process could save you tens of thousands of dollars.

The simple truth is that when it comes to nominating a repayment frequency – paying weekly, fortnightly or monthly – the rate at which you pay could save you a big sum of money over the life of the loan. But the amount you save will depend entirely on your lender and their method of calculating interest.

That’s because lenders may credit you with 24 payments per year, which is twice per month, or 26 payments per year when calculated fortnightly, according to research by RateCity.

Damian Smith, chief executive of RateCity, urged consumers to ask their lender how it calculates repayments, because the answer could significantly impact a borrower’s home loan balance.

“It’s possible to get big savings by paying your mortgage fortnightly rather than monthly – but it really depends on the lender,” he said.

Why the discrepancy?

Some lenders calculate ‘fortnightly’ payments by dividing a monthly payment by two, so borrowers make 24 repayments each year. However, other lenders debit payments every two weeks so customers make 26 payments in a calendar year and get credit for two additional ‘fortnightly’ payments each year.  

For some lenders debiting 26 payments per year, the repayments equal the same amount as monthly repayment would so borrowers aren’t paying any more each year by increasing their repayment frequency. However, they may save on interest because they pay part of the principal off sooner each month.

The dollar savings range significantly between lenders, from as little as a couple of hundred dollars to almost $80,000 over the life of the loan, so it pays to ask the question.

What every borrower should know

Regardless of the lender, borrowers can pay down their debt more rapidly by making additional payments or by making the most of simple home loan features, such as an offset account for instance.

You may only need to find a couple of extra hundred dollars each month to put a dent on your mortgage. For example, a $300,000 home loan repaid over 25 years at a rate of 7 percent would cost approximately $336,000 in interest. But by making additional repayments of $200 per month could shave the interest bill by more than $76,000 and reduce your loan term by almost 5 years!

To calculate how much you could save by tweaking your home loan repayments or by switching to a cheaper interest rate use RateCity’s home loan calculator or contact your lender.

Disclaimer

This article is over two years old, last updated on March 14, 2012. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.

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