Finance

A simple way to save $100,000 on your $500,000 mortgage

Fact or urban myth? Paying your mortgage weekly or fortnightly rather than monthly will save you heaps of money?

Fact, but maybe not the way you think.

A couple of years ago someone I met told me I should switch my mortgage payments from monthly to fortnightly or even weekly. I’d save heaps, she said.

I went to my bank calculator and checked it out. The savings were minuscule. Less than $500 over a 30-year mortgage

Like 30 cents a week. Worth switching, but only in the way it’s worth picking up a 20 cent coin in the street.

But it bugged me. Was I missing something here?

So a week or so ago I asked the question again, but this time using retail finance research and ratings company Canstar to crunch the numbers for me.

When general manager Jose George came back to me, he was kinda excited.

Canstar analysis showed changing my mortgage payments from monthly to weekly or fortnightly could shave almost $100,000 off my repayments for a $500,000 mortgage, cutting my total interest bill by 20 percent, he said. The savings were almost $200,000 if I was borrowing $1 million. 

That’s like picking up a $100 bill.

So which was right? How could I save $97,834 rather than $477?

It’s about how you slice up the year, George says.

The bank calculators take an annual payment and divide it by 12 to get the monthly figure, and by 52 to get weekly. The $477 difference over 30 years is because by paying weekly I am reducing my principle fractionally quicker.

But not enough to get excited about.

Canstar had done a different calculation. They took the monthly premium and divided it by four. But because there are four and a bit weeks in most months, that means I am actually paying a bit more each week.

Let’s say I’m repaying $60,000 a year. Using the bank calculator model, that’s $1154 a week. But if you take the monthly repayment ($5000) and divide it by four, now you are paying back $1250 a week - about $100 more than with the other model.

Over a year, that means paying back $5200 more, which is like paying an extra four weeks mortgage over the year. That’s going to bring down the principal owed faster, which in turn lessens the amount of interest you have to pay altogether and the time it takes to repay the loan.

“Restructuring repayments in this way is like tricking yourself into paying more," George says. "The weekly or fortnightly increase is minimal, but over time the benefits are substantial.”

George sends me a graph. It shows people can cut their interest costs by 20 percent (almost $100,000) and wipe more than five years off the amount of time before they pay off their mortgage - just by moving from monthly to fortnightly payments.

Going from fortnightly to weekly adds a bit more benefit, but not that much - less than $1000 over 30 years for a $500,000 loan.

George also sends me another five graphs. They have the same columns, but the parameters are changed to reflect different size mortgages, and a fixed rather than a floating interest rate.

With a fixed rate the interest rate is smaller, so the savings are too, but the Canstar weekly payments calculation sees someone's total interest bill falling by 16 percent and the term of their mortgage by four years, three months.

The trick, George says, is being proactive when you are talking to your bank. 

“By paying back a little bit more than you would, but keeping the increase relatively marginal, it ends up saving you heaps,” he says.

Some banks - Kiwibank, for example - suggest as part of their mortgage calculator how a small increase in payments can have thousands of dollars of impact.

"There's no magic formula," George says. "The more repayments you make, the faster your debt will disappear." 

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