An article with tips on how to pay of the mortgage faster landed in my attention over the weekend.
There was one tip in particular that caught my attention. The reason being it is not the first time I have seen this tip. In fact, I frequently see or hear about it and it isn’t actually true. Well barely anyway.
It’s the tip that suggests you change your mortgage payments from monthly to fortnightly, or even weekly. Why stop at weekly? Lets make mortgage repayments hourly! Ok that last one was tongue in cheek, but let me show you what I am talking about the only way I know how. With maths!
Let’s say you have $4,000 a month mortgage payments. If you were to pay the mortgage fortnightly your payments would be $1,846, and weekly mortgage payments would be $923. Note the mortgage payments for fortnightly are less than half of the monthly payments. That is because there are more than two fortnights per month on average.
Basically that means if you change your payments from monthly to fortnightly, it doesn’t change the amount of mortgage you are paying. It only changes the frequency. Because the mortgage interest is calculated daily it does mean you save a small amount by paying more regularly, but it is not by much.
Using our mortgage frequency calculator, assuming a $500,000 25 year mortgage at 5% interest rates, you would pay a total of $876,885 towards the mortgage if you were paying monthly.
If you change your mortgage repayment frequency to fortnightly, you would pay a total of $876,392 towards the mortgage. Savings of $493 over 25 years. Or put another way, less than $20 a year savings.
A lot of these articles tend to imply that the tip or trick is in increasing your repayment frequency. But that actually makes a lick of difference. It is the fact that they assume you not only change your payment frequency to fortnightly or weekly, but you also increase how much you are paying per month.
In our example from the fourth paragraph, it would mean increasing your fortnightly payments from $1,846 a fortnight to $2,000 a fortnight. That is the trick. Alternatively, if you are going to do that, you may as well increase your monthly payments by $334 a month if you are going to be paying $154 a fortnight extra. Same result except you get to keep your monthly repayment rate.
What does make the difference is increasing how much you put towards the mortgage, not the frequency. That is what a lot of these tips boil down to. Have more money. Put more towards the mortgage.
It’s amazing the amount of times this false information is spread by sources that a lot of people rely on. Just take a look at the list of sources that spout this false hack of payment frequency:
I think you get the idea.
A lot of these sources don’t even mention having to increase your payments. The linked article from Kiwibank makes no mention of having to increase your mortgage repayments to be significantly better off. They only talk about the fact you pay more frequently.
The other sources gloss over the fact you have to increase your payments. It’s not obvious to a lot of people reading this information that they need to increase their repayments. It sounds on the surface you only need to increase your payment frequency. Otherwise why even mention frequency? The only advice that matters is increasing how much you pay per month. Paying more frequently barely moves the needle.
It is a commonly perpetuated myth that increasing your mortgage repayment frequency will save you thousands of dollars. It’s completely wrong.
If this is what a lot of people understand as correct, they are making sub optimal decisions. For example, if someone is paid monthly and decide to increase their mortgage repayments to fortnightly (without halving the amount they pay), they may unnecessarily complicate their financial affairs. They may be thinking they are saving tens of thousands of dollars like the bank calculator told them, without realising they have to actually increase how much they contribute to the mortgage. In reality they may be saving less than $30 a year for the extra inconvenience.
Having the mortgage come out fortnightly when you are paid monthly is a pain. It may be worth it if you are saving thousands of dollars. Not for $30 a year. It makes cashflow and budgeting that much more difficult to manage.
TLDR – Don’t change the frequency of your mortgage payments to save money. Only increasing your payments will do that, along with the smart use of offset or revolving credit facilities. Your repayment frequency is best matched to your income frequency.
If you need help with any financial decisions , then get in touch today.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here