The Great Fortnightly Myth

The great fortnightly myth - pay your mortgage fortnightly and save thousands.

Pay your mortgage fortnightly and save $100,000.

Time and time again I hear people say, “I want to pay my mortgage fortnightly as I hear I can save thousands in interest payments, apposed to monthly”. Is that true they ask?

Yes and no I reply. Let me explain.

If you had a mortgage of say $300,000 over a term of 25 years and the interest rate was 8.5% the frequency is not that important, as the contract is for a (term) of 25 years.

Sure the frequency has some impact but very little.

If you paid monthly you wouldn't save a cent, weekly you would save $565 and if you elected to pay fortnightly, you would save a whooping $396 (over a 25 year term).

Are you sure they normally ask with a frown. But friends of ours are paying their mortgage fortnightly and their bank said they would save close on $100,000?

Sure they may be paying fortnightly but, how much are they paying fortnightly?

They said half their monthly payment.

Well there is the answer: the true fortnightly payment is not half the monthly payment.

The monthly payment based on the figures mentioned would be $2415.68 so half the monthly would be $1207.84, (not the true fortnightly payment which would be $1114.32).

There are 12 months in a year and 26 fortnights.

Lets do the math, $1207.84 (half the monthly payment) x 26 (fortnights in a year) = $31,403.84.

If you paid monthly $2415.68 x 12 months = $28,988.16

The difference, $2415.68, you have made one extra payment of $2415.68 in a year by paying half that amount fortnightly.

You have increased your payment which in turn will reduce your loan term and as interest is calculated on the (term) of the loan, you would save in the region of $100,000 just like your friend. Not only that, the loan (term) would reduce to 19 years and 9 months.

But remember, “half your monthly payment” don’t just waltz into the bank as many do and ask them to change your payments to fortnightly thinking, that was easy, now I will save a fortune as you will save zip, well not quite, $396 over 25 years.

The frequency should be inline with what suits you as an individual. If you are paid and budget weekly, pay weekly, if monthly, pay monthly and so on.

 

The above information is an excerpt from my eBook “How to avoid pitfalls when financing Real Estate” an 85 page plain talking insight into property finance within New Zealand. Packed with real life examples of how to get ahead in the property market, you simply cannot afford to not miss out on the information this book has to offer.

Make sure you sign up to this site to receive a special introductory offer when this book becomes available via this website in the next few weeks.

Yes! - I want to know how to avoid pitfalls when financing Real Estate!



Email Marketing by VerticalResponse