Query re paying mortgage fortnightly??

[MP123]

Hi all,

We decided to pay our mortgage fortnightly as we thought we'd be paying a little bit extra every year. I mailed the bank last week asking them to advise if by paying our mortgage fortnightly the extra money is coming of the capital rather than letting the overpayments accumulate? and we received the response "You pay 3.75% interest on the outstanding balance of the mortgage over the remaining term so there is no extra money/ overpayments as such by paying fortnightly".

I was just wondering if this is correct? Apologies in advance if that advice is correct, I think we got up in the hype of paying off our mortgage a little earlier than we thought!

 

[ryaner]

The main difference between paying fortnightly and monthly is that fortnightly gives you 26 payments a year compared to 12 payments a year for monthly. Assuming you split your monthly payment in two, then you end up paying an extra month in effect which should lower the term.

 

[shigllgetcha]

I thought the idea was that you owed alittle less because you were paying a small amount back alittle quicker each month so youd pay alittle less interest over the lifetime of the mortgage regardless of the two extra payments per year

ie you prepay €1,000 for a month

fornightly you paid back
€500 on 16th of the month
€500 on 30th of the month

so you were charged less interested because you didnt owe the full €1,000 for the month. you owed €1,000 from 1st to 15th and €500 from 16th to 31st

* the figures are exagerated for the sake of the concept and just using the example of owing one amount for a month

Might be completely wrong but thats would I took up from the last time I heard Eddie Hobbs talking about it

 

[serotoninsid]

This is something that has been discussed previously on aam. From what I recollect, there's no saving as such - it's just that as ryaner has said, you end up making more repayments - and this will account for and difference in total interest paid.

 

[Yakuza]

You do save on interest over the shorter term, so it's worth doing if you can afford it.
100K over 20 years at 4% costs:
€7358.18 if paid annually, €147,163.60 over 20 years (so €47,163.60 in interest)
€602.22 if paid monthly, €144,532.80 over 20 years (so €44,532.80 in interest)
€277.70 if paid 26 times a year, €144,404.00 over 20 years (so €44,404.00 in interest)

The above shows that you do save a little in interest if you pay in smaller periods.

The main saving is made when you pay half the monthly amount (€301.11 in this case), then the mortgage is paid off after 462 two-weekly periods (roughly 17 years and 9 months), and you've paid approx 301.11*462 = €139,112.82 (I say approx as the last payment is less than the full one, as the amount owed goes to zero between period 461 and 462).

So, in the above case, paying half the monthly payment every two weeks has reduced the term by roughly 11% and the interest paid by 12%

 

[Gulliver]

In a previous life I set up the mechanisms for fortnightly repayments in a major bank. The fortnightly repayments are not half of the monthly repayments; nor are they 12/26th of a monthly repayment. They are based upon a repayment every 14 days, and are calculated to repay the loan in exactly the same period as is the monthly repayment. The overall interest paid over the life of the loan will be a whisker smaller, due to the fact that by paying fortnightly, the payee is paying some of the repayment earlier each month as shown by Yakuza above.

It is, of course worthwhile to pay off a mortgage earlier if you can afford to, but only after you have paid off all other borrowings, which are inevitably at a higher interest rate.

 

[Yakuza]

Just to add to Gulliver's post, you can achieve pretty much the same effect as paying 26 times a year if you just pay an extra month's repayment every 12 months (this might be easier for your bank to accommodate). In the case above, the repayment period happens at period 215 (or 17 years 11 months) and you end up paying roughly €139,715.04 (again it's roughly as the last payment is smaller; just enough to clear the outstanding balance) which is close enough to the 26-times-a-year figure.