The repayment myth - weekly and fortnightly versus monthly
There is a myth in the mortgage marketplace, that by paying weekly or fortnightly mortgage payments instead of monthly, you can save big dollars and years off your loan term.
The myth is based on interest being calculated daily on the outstanding balance and by paying more often, should save you on the amount of interest paid over the life of the mortgage. This is, unfortunately, not the truth.
Switching your monthly mortgage repayments to weekly or fortnightly can save you interest; but this is all dependant on how your lender calculates your repayments.
Let’s say your monthly repayments are $800, which equates to $9,600 per year. If you wanted to switch to fortnightly repayments, and your lender calculated these by halving the $800, then you would be repaying $10,400 over a year (as there are 26 fortnights in a year = $400 x 26). Using this method, it would be the same for weekly repayments ($200 x 52 weeks in a year = $10,400).
The reason for this extra amount is that there is not exactly 2 fortnights in a month, or 4 weeks in a month, as there are typically 30 or 31 days per month. So with this method you would be paying an extra month per year (therefore reducing your mortgage by a month a year), without it probably making much of a difference to your budget. What looks like secret bank magic, is actually basic maths - you are simply paying more in the year than you would have via standard monthly repayments.
However not all lenders use this method. Some use the ‘true’ fortnightly and weekly method, where they would multiply your monthly repayment by 12 and then divide by 26 for fortnightly repayments or by 52 for weekly repayments.
So in this case it would be $800 x 12 ÷ 26 = $369.23, which is a smaller amount you would be repaying and thereby not saving you in the long run.
Be sure to check with your lender how they would apportion your repayments if you wanted to make the switch from monthly to fortnightly or weekly, to ensure the most benefit to you.
