Choosing the right frequency for your loan repayments is a decision many property owners contemplate. With the abundance of advice available, it can be challenging to determine which option is best for you. In this article, we will delve into the factors to consider when deciding whether to pay your lending weekly, fortnightly, or monthly. We will explore the mathematics in terms of total interest cost over the course of the loan behind each payment frequency and provide some insights on the matter.
Crunching the Numbers
Let’s consider a hypothetical scenario to understand the financial implications of different loan repayment frequencies. Imagine you have a mortgage of $500,000 with an interest rate of 7% over a 30-year term. The total interest paid over this period would amount to approximately just short of $700,000. The total interest cost figures vary only slightly depending on the frequency in which you pay.
When we compare monthly repayments to weekly it may seem appealing due to the perception that it will lead to significant interest savings. However, the actual amount saved is not as substantial as many may hope. In our example, switching to weekly repayments would result in savings of approximately $809 in interest over the course of 30 years. Not a lot in savings right over the entire course of the loan, as we progress on the path of dispelling this long-held myth…
Opting for fortnightly loan repayments can also be seen as a method to save on interest costs too. However, the savings are slightly lower compared to weekly repayments (when compared to monthly versus weekly repayments). In our example, switching to fortnightly repayments would lead to savings of approximately $549 over 30 years, when compared to your total interest bill paying monthly, over the course of your loan.
Monthly loan repayments are the most common choice among borrowers. While they may not provide the same level of perceived savings in interest as weekly or fortnightly repayments (although there is little in it as you can view above), they remain a popular option.
Is there a difference in actual repayment costs per annum depending on frequency?
When considering the actual amount paid yearly, between the repayment frequencies of weekly, fortnightly, and monthly, this comes in minimally different in annual repayment output. In a nutshell, we approximate around $20-$30 per year difference in repayments required for the year, whichever frequency you decide.
The “Extra” Payment Myth
One common misconception surrounding weekly loan repayments is the belief that they result in an extra monthly repayment each year. This notion arises from miscalculating the number of weeks in a year as 48 (12 x 4), whereas there are actually 52 weeks in a year. Consequently, some believe that making weekly repayments allows them to make 13 monthly repayments instead of 12, thus reducing their overall interest paid.
However, banks and financial institutions have accounted for this misconception, and there is no real advantage to making weekly repayments to reduce the total material interest paid over the term of the loan. The repayment amount required to pay off the lending within the agreed term is calculated based on the interest rate and loan term, regardless of the repayment frequency – that is the key!
The Bottom Line
While adjusting your loan repayment frequency can result in some savings, it is not a magic fix that will significantly impact your overall interest paid. The key factors materially affecting your debt amortisation are the repayment amount and the use of revolving and offset mortgages. This is an area we can and do advise on regularly.
We emphasise that the size of the repayment and the effective use of revolving facilities play crucial roles in interest cost savings. Instead of focusing solely on the repayment frequency, which as demonstrated plays little part in the total interest bill endured, consider optimising your repayments by using a revolving or offset facility effectively. By setting your repayments monthly and delaying the deduction to once a month, you can potentially reduce accrued interest costs earlier in the term lending repayment cycle.
Additionally, the use of revolving and offset mortgages can be a valuable strategy. It is not solely about the size of the mortgage but rather finding the right balance of debt based on your financial position and plans. Consult with a financial advisory, such as RSFA (Rod Schubert Financial Advice) to determine the best approach for your specific circumstances.
When deciding whether to repay your lending arrangement weekly, fortnightly, or monthly, it is important to consider the financial implications and evaluate various strategies. The key lies in optimising your repayment amount and effectively utilising revolving and offset mortgages.
Ultimately, we can consult with you to provide personalised guidance based on your financial goals and circumstances. By making an informed decision and implementing the right strategies, you can manage your lending arrangement effectively and potentially save on interest costs over the course of your loan.
This blog contains general information only. The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Rod Schubert Financial Advice (RSFA) shall not be liable or responsible for any information, omissions, or errors present. We recommend seeking professional legal and/or financial advice before taking any action. Our Disclosure Statements are available on our website.