Repay a Home Loan Faster and Reduce Interest Payments

Repay a home loan faster and reduce interest payments is something you can achieve if you know how, and can adopt a disciplined approach, to managing your finances.   

If you’re a homeowner, homebuyer, or investor with a mortgage, you’ve probably wondered how you can possibly repay your home loan faster and reduce interest payments.  

The good news is that small changes to your repayment frequency can make a big difference over the life of your loan.  

Let’s break it down and explore how weekly, fortnightly, and monthly payments impact your interest costs and the period of your mortgage loan. 

Understanding Mortgage Repayment Cycles: Why Weekly, Fortnightly, and Monthly Payments Differ 

When it comes to repaying your home loan, choosing the right repayment cycle is crucial for reducing interest costs and paying off your mortgage faster. However, many homebuyers and homeowners are unaware that the method of calculating your repayments can significantly affect the total interest paid over the life of the loan.  

Here, we’ll take a closer look at the different repayment cycles—weekly, fortnightly (26 cycles), and monthly repayments—and why they result in different interest savings. 

Why Payment Frequency Matters 

Mortgage repayments are typically calculated based on interest in arrears, meaning the interest is calculated on the outstanding balance of your mortgage at the end of each repayment cycle. However, the frequency of your repayments can significantly affect how much interest you pay and how quickly you can pay off your loan. 

Here’s the different repayment frequencies that are generally available: 

1. Monthly repayments: 12 payments per year. 
2. Fortnightly repayments (26 cycles): 26 equal repayments per year, the totals of which are equivalent to 12 standard monthly repayments. 
3. Accelerated fortnightly repayments (half of standard monthly repayments): 26 repayments per year, but the totals of which are equivalent to 13 standard monthly repayments, helping you pay off your loan faster. 
4. Weekly repayments (52 cycles): 52 repayments per year, the totals of which are equivalent to 12 standard monthly repayments. 
5. Accelerated weekly repayments (quarter of monthly repayments): 52 repayments per year, but this equals 13 monthly repayments annually, further reducing your loan term and interest. 

 Example: Comparing Repayment Frequencies 

Let’s look at an example of a $500,000 loan with a 30-year term and a 6% interest rate and draw out the key points: 

Repayment Frequency	Repayment Amount	Total Repayments	Total Interest	Interest Saved
Monthly	$2,997	$1,079,191	$579,191	–
Fortnightly (Non-Accelerated)	$1,382	$1,078,674	$578,674	$517
Fortnightly (Accelerated)	$1,498	$955,130	$455,130	$124,061
Weekly (Non-Accelerated)	$691	$1,078,452	$578,452	$739
Weekly (Accelerated)	$749	$955,130	$455,130	$124,061

 

Key Points include;

1. Accelerated fortnightly or weekly repayments (equivalent to 13 monthly payments annually) save significantly more interest over the life of your mortgage compared to non-accelerated repayments. In the example above, accelerated repayments saved $124,061 in interest over the life of the loan. 
2. Non-accelerated fortnightly or weekly repayments (26 or 52 cycles) only save a small amount of interest because they’re equivalent to 12 monthly repayments annually. 
3. Splitting your monthly repayment in half and paying bi-monthly (every two weeks) effectively adds an extra repayment each year, reducing your loan term and interest payable. 

 Simple Strategies to Repay Your Loan Faster 

1. Pay half of your monthly repayment amount every fortnight or a quarter of your monthly repayment amount every week. This adds an extra repayment each year, reducing your loan term and interest. 
2. Use bonuses, tax refunds, or savings to make additional lump sum repayments toward your principal. Even small lump sum repayments can make a big difference over time. 
3. Link an offset  savings account to your mortgage to reduce the interest calculated on your loan balance. 
4. Compare lenders and refinance to a lower interest rate to reduce your monthly repayments and overall interest. 
5. Work with a mortgage broker to ensure your loan structure aligns with your financial goals. 

 Why Engage with a Mortgage Broker? 

Engaging with a mortgage broker can be a strategic move to pay off your home loan faster. Here’s how they can help:

1. Expert Advice: Mortgage brokers have extensive knowledge of the home loan market. They can help you find lenders offering flexible repayment options or lower interest rates, which can save you money in the long run.
2. Tailored Solutions: A broker can analyse your financial situation and help create a plan to accelerate your repayments. This could include refinancing or switching to fortnightly payments instead of monthly ones, which reduces interest over time.
3. Saving Time and Effort: They navigate the complexities of the loan market for you, comparing options and negotiating with lenders, so you can focus on other priorities.
4. Uncovering Opportunities: Brokers might find special deals, discounts, or products that you wouldn’t easily access on your own.

Conclusion

At Oz Lend we offer full mortgage broking services to our clients. Contact us if we can help you to better understand how to repay a home loan sooner and reduce the overall costs of your home mortgage.