Australian home owners could save as much as $80,000 over the life of their loan by changing the frequency of their repayments, a mortgage broker has revealed.
Instead of paying in monthly instalments, Australian borrowers should consider switching their repayment schedule to weekly or fortnightly payments, mortgage broker and founder of Two Red Shoes Rebecca Jarrett-Dalton told Yahoo Finance.
That’s because interest is calculated daily, so making more frequent repayments will save on interest. And as banks will generally calculate monthly repayments based on a four-week month, paying weekly will actually see you pay off your home loan faster, as there is only one month that actually has only four weeks, Jarrett-Dalton said.
Jarrett-Dalton said she’s seen borrowers making this switch save as much as $80,000 over the life of a loan.
“You’ve got the compounding effect of having paid one-twelfth extra every year as well as getting the money in there sooner – and the sooner you can lower your balance, the more interest you’re saving,” Jarrett-Dalton said.
What if I get paid monthly?
While Jarrett-Dalton believes weekly or fortnightly payments will save borrowers the most, it can be tricky for home owners who are paid monthly.
She doesn’t endorse holding back money to make weekly or fortnightly repayments, instead using an offset account.
“We encourage people to use an offset account so that they’re saving interest,” Jarrett-Dalton said.
“Then, they could – if they wanted to – increase their monthly repayment by one-twelfth, and then they’d be roughly in line with having paid weekly or fortnightly.”
How do I change my repayment schedule?
In most cases, the simplest thing to do is ring your bank and ask to change how you make your repayments, Jarrett-Dalton said.
“If you’re in the middle of the month, they might ask you to make half a month’s repayments so you don’t fall behind, and then switch it to weekly at the end of that pay cycle,” she said.
“The only asterisk around that is that sometimes you might have a fixed rate with a fixed term for that loan, in which case you may not be able to do it. But generally, you can switch and it makes budgeting easier.”
Jarrett-Dalton’s tips come amid new research from Finder finding 74 per cent of Australians are stressed about their financial situation, while recent data from Digital Finance Analytics also found that more than 1.5 million Australians are under mortgage stress as the country experiences its first recession in 30 years.