The most important thing to know about home loans is that interest is calculated on the daily balance and charged to the loan account monthly in arrears.
Take advantage of this fact, because if you can reduce the daily balance, even by just $1, you will save on both term and interest.
When quoting mortgage repayments lenders often talk in months, for example “your monthly repayment on a $500,000 mortgage at 6% over 25 years would be $3222.”
Just because they quote in months doesn’t mean you have to pay monthly.
So long as you meet the minimum repayment by your due date (this is typically a month after the loan is drawn down) lenders aren’t bothered about when you make your repayments.
The trick to saving (besides making extra repayments) is to make repayments before your due date. But do you pay weekly or fortnightly?
Surprisingly, both save you pretty much the same amount of money. The easiest way is to align your mortgage repayments to your pay. The trick to saving more, however, comes down to how you calculate these repayments.
By taking the minimum monthly repayment, halving it and paying the halved amount every two weeks, borrowers can save a substantial amount off both the term and interest.
That’s because there are 26 fortnights in a year – the equivalent of 13 monthly repayments rather than 12.
For those borrowers who divide their minimum monthly repayment by four and pay weekly, the savings are slightly higher still on interest but not so much on term.
It’s important to note here that some lenders, when calculating fortnightly payments, take the monthly repayments figure, multiply it by 12 and then divide it by 26 to give you a fortnightly amount.
While this is correct, it will not reduce your home loan so fast.
While it can look good on paper, as it reduces your commitment, it goes against the benefits of fortnightly repayments.
Don’t fret too much if you get paid monthly because you’ve got two options here.
If the loan is new then make your monthly repayment as soon as you’re given your account number. That way you’ll always be ahead.
If the loan isn’t new, then ask your lender if it comes with an offset account. Redraw could also work but check if any conditions are attached to it.
The idea is that on pay day your entire salary goes into your offset or redraw facility. You use an interest-free credit card for your living expenses.
During this time, and when your credit card bill comes, the salary in your offset or redraw account is cutting your home loan interest bill.
This strategy only works if you don’t spend more than your budget allows and you repay your credit card before the interest-free period ends.
Fixed-rate home loans may not be as flexible as variable rate loans so be sure to check with your lender first.