Save thousands on your mortgage

Author: Peter Roderick

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.

About the author: Peter Roderick is a mortgage specialist and Director of Refund Home Loans Beechmont. For more information, articles, news, tools and valuable resources on home or investment loan, refinancing, debt solutions, visit this site: http://www.refundhomeloans.com.au or email peterroderick@refundhomeloans.com.au to register for our free monthly newsletter.