Conon Pope's Irish Times article: knock 20% off mortgage repayments fortnighlty pmts

This article was in the IT today regarding how we can decrease our overall mortgage interest.

[broken link removed]

by....CONOR POPE
MORTGAGE REPAYMENTS: HOW WOULD you like to knock as much as 20 per cent off the cost of your mortgage without breaking a sweat? Believe it or not, it can be done – and it is not hard – yet for reasons that are beyond us, virtually no one is doing it.

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I am a tracker mortgage holder with KBC and would be curious to know if any tracker mortgage holders do pay their mortgage fortnightly? I have yet to call the back to enquire if it is possible.

newbie.

That is a disappointing article from Conor Pope.

“The mortgage holder could knock almost €54,000 off the cost of their loan,” says Frank Conway, director of moneycoach.ie.

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It stems from a failure on the part of Conor and the Moneycoach to understand the time value of money. Indeed, most people don't understand this.

The "€54,000" is over 30 years. A euro in 30 years time will be worth a lot less than a euro today. So adding them up is a meaningless, exercize.

You should review the cost of your mortgage on an annual basis based on the APR. So if you have an interest only mortgage of €300,000 @ 5%, the true cost of your mortgage is €15,000. It will be less if it's a repayment mortgage. It will be a bit less again, if you pay your monthly repayment a bit earlier.

So if you have money sitting in your current account earning no interest, it is better to pay it against your mortgage. You will save a few hundred 2011 euros by doing so. Review the strategy next year and remember that you are then dealing with 2012 euros.

He may as well have said "How to save €279,000 on your mortgage". The answer repay your mortgage in full today, so you don't have to pay any interest.

Exactly how much will you save this year by paying your mortgage twice a month, instead of monthly?

300,000 @ 5% for 30 years will result in a monthly repayment of €1610.46

If you pay €805 in the middle of January, instead of at the end of January, you will save €1.55 in interest. If you do this every month in the year, you will save €18.57 that year. In other words, your mortgage will be €18.57 lower at the end of that year.You can round this up to €20 to allow for interest on interest saved.


This is the correct way of looking at it.


Note the difference between "twice a month" and "every two weeks"
This is imporant. Twice a month is 24 payments a year. Every two weeks is 26 payments a year. If you make more payments you will pay off your mortgage quicker.

Edit: It appears that Conor's calculations are based on making fortnightly payments, so you would be actually paying an extra €1,800 each year. So, of course this is going to save you interest.

You probably should not make any change to a tracker mortgage
It is likely that the lenders will offer some incentive to people to increase their repayments on a tracker mortgage. If you have already done so, they won't give you an incentive. See this post "Bank won't revert mortgage term"

Paying twice monthly to make huge savings is a myth.

Granted you may shave a small sum off the mortgage but the only way to save the 54k as described is to pay bi-weekly i.e every two weeks = 26 payments = 13 months.

As you are paying back an extra month, this is taken off the capital sum resulting in the large savings as described in the article.

A simple way of doing this for those who wish to continue to pay monthly is to divide your current mortgage repayment by 12 and add the resulting figure to your monthly repayment.

e.g you pay 2400 per month. Divide by 12 = 200. Add 200 to your current repayment = 2600 per month. This will have the same effect as making bi weekly payments but without the hassle of having to make 26 payments per year.

The only people who should switch to bi weekly payments are those that are paid twice per month...if you ask me.

You cannot save 54k in mortgage interest by repaying the same amount - if it sounds too good to be true, it usually is.

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I thought as much. I read the article two times because I couldn't understand how you save money if you do what he says.
If I pay off 100 at the beginning of the month from 1000, then for the rest of the month I'll be charged interest on 900, but if I pay off 50 then I'm charged interest on 950 for the first half.
Am I wrong??

Brendan Burgess said:

You probably should not make any change to a tracker mortgage
It is likely that the lenders will offer some incentive to people to increase their repayments on a tracker mortgage. If you have already done so, they won't give you an incentive.

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I'm not sure this is good advice. You WILL save money by repaying your mortgage twice-monthly as opposed to monthly. To not make this change in the hope the bank will offer you some deal down the line doesn't make sense to me.

Anyway, I rang BOI and they seem to be engaging in a campaign of fear, uncertainty, doubt. They claimed that, although the interest is calculated daily, the interest is applied quarterly and so any savings are marginal!! Can anybody here understand that viewpoint..?

This appears to me to be hokum. Ardent, (or anyone) can you explain to me how, if interest is being charged daily, and I have to pay €100 to pay off a loan it makes sense for me (if I'm only interested in reducing my mortgage interest) to pay €50 now and €50 in a fortnight's time rather than €100 now?

Though it must be said I think this whole "pay down your mortgage early" is bad advice. Simply put in my case - such advisors want me to lock away money for the next 15 years to save 1.55%, when I can save and earn 3%+ post DIRT and have ready access to the cash (see key post by Brendan in this General Finance forum)...and that is good advice? yeah rih.

It was a poor and potentially misleading article. It pretends that there are huge saving to be had by paying half the mortgage amount twice a month. The claimed savings are based on fortnightly payments. The best a wages paid-monthly mortgage holder can do, other than pay lump sums and increase repayments, is to have the mortgage payment come out on the same day as they get paid.

My understanding is as follows:

Interest is paid in arrears. This means your principal and interest payment will pay the interest for the 30-day period immediately preceding your payment due date.

So, say your payment is due December 1. When you make your payment for December 1, you are paying the interest for the entire month of November, all 30 days.

The article seems to suggest that, it's better to pay half the payment on November 15 and the other half on Decemeber 1. Given that interest is calculated on a daily basis, this will reduce the amount of interest due.

I'm no expert but it sounds perfectly reasonable to me.

Ardent said:

The article seems to suggest that, it's better to pay half the payment on November 15 and the other half on Decemeber 1. Given that interest is calculated on a daily basis, this will reduce the amount of interest due.

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Ardent, if this is how you and Conor Pope are arriving at the savings then fine, but lets be clear - this is simply mortgage overpayment by another name, , and not from some magical moving to bi-monthly, which the article seems to suggest.

Example: If - as I suspect is the case for most people - my mortgage payment is synchronised with my monthly salary, to achieve the saving I would need to find and pay an extra €50 (in my example) 2 weeks before (15 Nov) I get paid (on 1 Dec) in order to secure the savings talked about

...i.e. mortgage overpayment....

Fundamentally: if the IT wanted to write an article about overpayment of mortgages then they should have done so in a straightforward manner, hence I suspect the general disappointment with this article on this forum.

It's a ridiculous article, it purports that you can save €54k simply by paying your mortgage twice monthly instead of once a month.

I have been inundated with calls from clients asking why I didn't tell them this so it has taken up a lot of time explaining it.

The only way you can make those savings is by paying bi-weekly, i.e every fortnight so 13 months paid instead of 12.

This is simply overpaying your mortgage as alluded to by thedarkone.

I'd say the administrative cost of the banks trying to pander to people paying small amounts whenever they feel like it would more than eat up the interest savings.

How about this? If you believe this is such a money saver, why not pay your first mortgage repayment in advance on the day you take out the mortgage. That'll save you even more than paying twice monthly in arrears and save the messing.

Just for the record, say you borrow €300k for 20 years at 5%, you can either repay:
€1961.51 each month (Payment in full on the last day of the month) or
€1959.51 each month (Half paid in the middle of the month, half paid at the end of the month). Congrats, you've reduced your repayments by 0.1%, hardly worth calculating!

Der Kaiser

I got the impression from reading the article quickly that he was proposing two payments a month, rather than every two weeks.

So even the €54,000 is completely wrong and is primarily due to the fact that they are paying an extra payment every year.

Are you sure of your figures? I get €1979.87 from Dr Calculator.

Anyway, what is the effect of paying half of it mid month and half at the end of the month?

Brendan Burgess said:

Are you sure of your figures? I get €1979.87 from Dr Calculator.

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That would correspond with using a monthly interest rate of 5%/12 (or 0.4166%) which would be 5.116% APR, I'm cutting to the chase and using 5% APR (or 0.4074% per month)

Brendan Burgess said:

Anyway, what is the effect of paying half of it mid month and half at the end of the month?

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The best way of thinking of it is that you'll get half a month's interest on the money you repay half a month early. In this case you'd get half a month's interest (0.2%) on the half payment (€1k). That's a €2 per month impact whatever way you look at it.

You'd achieve the same or more by leaving it on deposit for the half month.

But most people's mortgage repayment probably comes out of a current account earning almost zero interest (as Brendan said above).

I agree that the article overeggs the potential saving and is misleading, but I'm quite happy to pay my NIB tracker in twice-monthly (not fortnightly) payments. The first payment comes out a day or two after I get paid, the second a few days after all my DDs and my credit card. There's no extra "hassle" involved, and it saves me a few quid. It certainly beats watching my balance and moving funds from an interest-earning account into my current account only as needed, which is what you seem (?) to be suggesting as the alternative.

Ardent said:

My understanding is as follows:

Interest is paid in arrears. This means your principal and interest payment will pay the interest for the 30-day period immediately preceding your payment due date.

So, say your payment is due December 1. When you make your payment for December 1, you are paying the interest for the entire month of November, all 30 days.

The article seems to suggest that, it's better to pay half the payment on November 15 and the other half on Decemeber 1. Given that interest is calculated on a daily basis, this will reduce the amount of interest due.

I'm no expert but it sounds perfectly reasonable to me.

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Your point is correct - this will reduce the amount of interest due. However, by nothing as much as the article claims.

Irish Times said:

But if you pay off €500 every fortnight, then for the second half of that first month, the amount of interest you pay is less because for two of the four weeks, the capital owed is €99,500.

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As most of each of my payments in the early days is interest, less than 1/3 (taking the 30 year example) of my payment goes towards the principal, so the amount of capital owed is closer to €99,350. So I save half a month's interest on €150 each month, or about €7.50 per year.

Irish Times said:

In this scenario you will pay a little bit more, admittedly.

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Yes, 8.33% more per month to be precise.

Another section of the article talking about "a customer taking out a 30-year mortgage but paying it off over 15 years can save themselves €152,737 in interest charges" is also misleading.
Why not take out a 40 year mortgage and pay it off over 15 years and save even more? Surely most people affected by this article already have mortgages and so cannot change the term. The main point should be that paying a mortgage off quicker can save you in interest payments, if the interest rate of your mortgage is higher than the net rate in a savings account.
Taking out a mortgage for a longer term than you intend paying it off over does allow the flexibility of reducing monthly payments without penalty if desired, but paying off a 30 year mortgage costs exactly as much as taking out a 15 year mortgage if you pay both off over 15 years.
Looks like he's just quoting the mortgage broker's sales pitch verbatim.

I see the Irish Times have now made some corrections, but not all. It's still a badly worded and misleading piece. Not one of Conor Pope's better articles.

Irish Times said:

This article was amended on April 4th, 2011. In the original, it incorrectly stated such savings would come at no additional cost to the mortgage holder. While some small savings can be made by simply splitting payments from monthly to twice a month, they are small as the mortgage holder is not paying off the capital any faster.

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They've updated the article now as the original premise was rubbish (significant savings to be had merely by paying half as much twice as often). It is amazing how the author blithely ignored the difference between "twice a month" and "every two weeks".

I knocked a spreadsheet together for a similar thread on Boards.ie (I had a link to it in DropBox but I just discovered I can't link it as I am a relative newb here in posting terms).
It shows the effect of paying monthly on one side and the other side, that of paying twice a month (but half the amount each time). For the case in point (300k, 30 years, 5%) , the savings turn out to be of the order of €2000 (or about a month and a bit off the term), which has a present value of about €460.

I used an annual rate of 5% compounded monthly in my calcs, it may vary slightly from others done using 5%/12 etc.

Personally, I get the same effect (and with much less hassle of having to make sure that cash would be in the feeder account at the right time) by just throwing a quarter of a month's payment against the balance every couple of months (I have an NIB tracker and their online banking is very good). By not doing the every-two-weeks thing I also allow myself the flexibility to not make the extra payment if things are tight.

anotherdub

Another section of the article talking about "a customer taking out a 30-year mortgage but paying it off over 15 years can save themselves €152,737 in interest charges" is also misleading.
Why not take out a 40 year mortgage and pay it off over 15 years and save even more?

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That is absolutely brilliant. I have had great trouble explaining to people why these sort of statements are meaningless and have never managed to do so. Your example, makes it much clearer.

I see the correction on the Irish Times website, but the thrust of the article seems to be the same?

HOW WOULD you like to knock as much as 20 per cent off the cost of your mortgage without breaking a sweat? Believe it or not, it can be done – and it is not hard – yet for reasons that are beyond us, virtually no one is doing it.

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This contributes to the general view that mortgage lenders are tricking their customers out of money.

From this very long thread on the topic on boards.ie , apparently Conor was on Newstalk saying the same thing and some other mortgage broker said it on Matt Cooper yesterday evening.

Conor Pope has a new article on this in today's Irish Times.

Unfortunately as I have only just joined this site I can't post the URL. But it is entitled "[broken link removed]

I must say i am disappointed with the general tone of this article as it focuses mainly on the attitude of banks to repayments other than monthly whereas a clear error was made in the original article.