Save thousands on your mortgage
One way of saving thousands of dollars on your mortgage is by
switching your payments from monthly to weekly or fortnightly.
Weekly or fortnightly mortgage payments have been growing in
favour with home owners across Australia and many institutions
now offer these payment options. The fascination with more
frequent payment options is that if they are done correctly you
can take several years off your mortgage amortization and thus
own your home free and clear years ahead of paying on a monthly
basis.
Why is this? The trick is in how the weekly or fortnightly
payment is calculated. To achieve the rapid amortization you
would take the monthly payment amount and divide it by four
(weekly payment) or by two (fortnightly payment). By doing this
you end up reducing your mortgage principal each year by the
amount of the monthly payment.
A simple illustration will help explain. If for example your
monthly mortgage payment was $400.00 you would make a total
yearly payment of $4,800.00 (400 X 12 months). By dividing the
$400.00 by 4 you would have a weekly payment of $100.00 and thus
pay a total yearly amount of $5,200.00 (100 x 52 weeks).
Similarly by dividing the $400.00 by 2 you would have a
fortnightly payment of $200.00 and again pay a total yearly
amount of $5,200.00 (200 x 26 fortnightly pay periods). You can
see from this example that both alternate payment methods result
in an additional $400.00 ($5,200 - $4,800) being applied to your
mortgage each year which comes directly off the principal. These
accelerated payments can reduce a 25 year mortgage amortization
down to 21 years. That's four years of mortgage payments saved.
Since you pay your mortgage with "after tax" dollars, think of
what you would have to earn before taxes to see the true impact
of the savings.
Weekly and bi-weekly mortgage payments are thus another form of
forced saving and these options are certainly attractive for
those whose employment pay periods fall the same way. However,
not all weekly mortgage payments are calculated using the rapid
amortization process noted above so you may have to confirm this
with your broker or lender.