Warning over simple mortgage-repayment hack

Since the Reserve Bank has hiked interest rates 12 times over the past year and a half, many Aussies are struggling to keep up with rising mortgage repayments.

In fact, the average Aussie’s mortgage repayments have risen around $15,000 annually since April last year.

But there is one way to get ahead on your mortgage. Switching to fortnightly repayments is a popular way to get ahead of debt, but Aussies may be caught out by how their lender calculates this amount, RateCity.com.au research has revealed.

“If you’re looking to get ahead by switching to fortnightly repayments, check which way your bank calculates it. If you find you’re not going to pay extra, ask the bank to increase your minimum repayments so you do,” RateCity head of research Sally Tindall said.

“Just be aware, if you’re controlling your extra repayments, you may need to recalibrate this amount if and when your rate changes.”

Two ways to calculate fortnightly repayments

There are two ways banks calculate a customer’s repayments if they are switching from monthly to fortnightly amounts:

1. Dividing the customer’s current monthly repayments by two

2. Multiplying the customer’s current monthly repayments by 12, then dividing this figure by 26 – the number of fortnights in a year

The ‘divide by two’ method

Halving the monthly repayments and paying that fortnightly would see customers make an extra two fortnightly payments a year.

That’s because the repayments are calculated based on there being 24 fortnights in the year (2 x 12 = 24) but the customer ends up paying this amount 26 times a year, not 24.

The ‘multiply by 12 then divide by 26’ method

This is the more mathematically accurate way to calculate fortnightly repayments, however, it won’t result in customers paying significantly more each year.

That said, because home loan interest is calculated daily, any payments made earlier than usual will help reduce that month’s interest bill.

What is the difference between the two types?

If the goal is to get ahead on your mortgage, then dividing your repayments by two and paying this amount every fortnight is the clear winner, provided you can afford it.

RateCity analysis found that if a customer with a $500,000 debt and 25 years remaining used the ‘divide by two’ method, they could potentially save a whopping $97,584 and pay off their loan four years and three months early.

On the flip side, if a customer switched to fortnightly repayments with a bank that used the ‘multiply by 12, divide by 26’ method, they could save an estimated $8,142 over the remainder of their loan, and pay it off three months early.

This is based on an owner-occupier paying principal and interest on the average rate of 6.23 per cent with 25 years remaining on their loan.

“Paying extra into your mortgage isn’t likely to be at the top of many families’ priority list right now, but the more you can contribute, the bigger the buffer you’ll have to fall back on if you hit a bump in the road,” Tindall said.

“Extra repayments also help reduce your interest bill, which can be critically important in a high-rate environment.”

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