I have a mortgage and have 10 years left on it. I have been told by a colleague who is doing an MBA that if I pay my mortgage every two weeks, it could lessen the number of years I pay back by one to two years.
Is this true and if so will my bank allow me to pay the mortgage every two weeks?
Mr TW
Accelerating your mortgage repayments is certainly a way of cutting the cost to you. The advice of your friend makes sense but it is not quite the home run you might think it is, and how much you will actually save depends on how much is outstanding on the loan and what mortgage interest rate you’re paying.
And then there is the far more practical issue of whether your lender will allow it at all.
The first important thing to note is that if you are paying fortnightly rather than monthly, you will effectively be making an extra monthly payment every year. You currently have 12 monthly payments a year: if you switch to fortnightly, you are likely to have 26 payments every year, given the 52 weeks you’re working with.
You might alternatively try to agree with your lender to pay, not fortnightly, but twice a month on set dates – the 1st and the 15th maybe. There’s no guarantee the lender would go with the idea but, if they do, it will also impact the savings you make in both time and money. Unsurprisingly, you will save more paying fortnightly than you will paying twice a month.
For the purpose of giving you some class of an answer, I made certain assumptions.
First, I presumed that your original loan was for 30 years and that you borrowed €350,000. That would mean that you have made 240 monthly payments to this point and have 10 years left. On interest rate, again I assumed that you are on the most competitive current variable rate of 3.15 per cent.
Crunching those numbers on a helpful mortgage calculator tells me that, by paying fortnightly, you would pay your mortgage off 11 months early – in nine years and one month rather than 10 years – and that you would save €2,513 and change in the overall amount you paid on the mortgage by then.
For comparison, on the same basis, if you had paid fortnightly since the start of the loan, the savings would have topped €26,000 and you would have shortened the mortgage term by three years and eight months.
Paying twice monthly still saves you money because you are reducing the amount on which interest is assessed two weeks early every month, but not as much.
Other methods
But there are other ways of cutting the life of your mortgage, and the overall sum you pay the bank.
For instance, you could just increase your monthly payments by €100. Using the same set of assumptions, that would save you about €2,285 and change and mean your mortgage is paid off nine months earlier than it would have been.
With both interest rates and prices rising generally, maybe that’s not so practical but if you had some savings to hand that you wanted to use against the home loan, it too would have an impact.
Say you paid a lump sum of €10,000 off the principal of the loan now, what would that do for you? Well, you could use it to reset your monthly payments to a slightly lower sum – about €97 in this case. That would not see the loan paid off any earlier but you would save yourself about €1,646 over the cost to you if you simply paid your mortgage as you are now for the next 10 years.
Even better, if you can afford it, pay the €10,000 lump sum and continue to make the same monthly payments as you do now. That will save you nine months of the term of the loan and about €3,540 in interest.
The savings in the examples above also assume rates will stay as they are for the remaining 10 years of your loan. We all know that’s not the case. Rates will certainly rise through next year but will come back again later in the cycle. Those changes would also affect your ultimate savings in money and time on accelerating payments on the home loan.
Clearly, you will have to crunch the numbers yourself on the basis of the actual mortgage loan size and term, the amount outstanding and the interest rate you’re paying. But as you can see there are different ways of approaching this and each has its savings.
The reason I raise it is that your bank may be open to one approach – saying making a lump-sum payment or voluntarily increasing your monthly payments – but less open to moving to fortnightly or twice-monthly payments.
Interest rate
There’s also the question of the interest rate you have. If you are on a fixed rate, it is unlikely the bank will be open to any of the above options, at least until the end of the current fixed term. And if you want to break the fixed term, it will cost you so that would offset any potential savings.
However, you could wait to the end of the current fixed term and make the move then before locking into a new fix or, less likely, moving to a variable rate. If you’re on a tracker, you’d need to look at your contract or approach your lender and see what they will allow.
But certainly, as you can see above and as your friend has advised, there is money to be saved – and an early end to your mortgage.
As always, I should remind you that accelerating payments on your mortgage, which is the cheapest money you will borrow notwithstanding the current cycle of interest rate increases, only makes sense if you are not having to borrow elsewhere at a higher cost for other items – such as a new car or monthly credit card payments.
If you have other outstanding debt, use any extra money to pay that off first before looking at your mortgage. And if, like me, the prospect of replacing your current car is looming in the not too distant future – or any other similar expense like college fees or a special holiday – then you’d be better advised to set aside any extra money available to meet that costs and avoid or reduce having to borrow for it at rates that will certainly be higher than your mortgage.
If you’re going to crunch those numbers, here are the URLs for the mortgage accelerator calculators I used. All are freely accessible. Don’t worry that one is Australian. The principle is the same even if the currencies are not. I’m sure there are alternatives but these were just the ones I used.
Moving to fortnightly payments: https://www.mortgagechoice.com.au/home-loan-calculators/fortnightly-repayments-calculator/
Lump sum payment: https://aib.ie/our-products/mortgages/mortgage-overpayment-calculator
Increasing monthly payments: https://www.ccpc.ie/consumers/money-tools/extra-mortgage-payments-calculator/
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice
