Home Loans – Paying monthly or fortnightly?

Reducing your home loan can be a long and tedious task and there a number of ways to pay it down faster. One of those ways is paying fortnightly instead of monthly. Its a simple strategy, yet many do not know the benefits of paying your home loan fortnightly. Depending on your lender this option should be available and can easily shave up to five years off your home loan.

The following case study illustrates the difference:

Jan lives in Sydney with a home loan of $400,000, her interest rate is 7% and she is paying monthly principle and interest. Her monthly repayment is $2,827 on a loan period of 25 years. Now over 12 months she would have paid 12 x $2,827 = $33,924. So alternatively to pay fortnightly she divides the monthly payment by 2 which is $1,413. As there are 26 fortnights in the year she will make 26 x $1,413=  $36,751 in total repayments over the year.

So she has made an extra repayment amount of $2,827 (one extra month) over the year. Over time this in turn reduces the amount of interest she pays and also reduces her home loan more quickly. 

The table below illustrates the difference in her home loan over 25 years:

  Monthly Fortnightly
Home Loan $400,000 $400,000
Repayments $2,827 $1,413
Years taken to pay off loan 25 21
Total interest paid $448,133 $361,420
Total interest saving   $86,712

This strategy forces Jan to save to a little more each year without impacting her lifestyle and the end result is a massive $86,712 in interest savings with the loan paid off 4 years earlier.

Learn more about strategies that can massively reduce your home loan, download the comprehensive guide here.