While there’s always been a long-standing debate between the virtues of fixed-rate or variable-rate home loans, a key question which often gets swept under the rug is a home loan’s repayment frequency options.
Your mortgage or home loan repayments will typically take into account costs such as the annual interest rate, loan term, repayment frequency, loan amount, and whether you wish to pay all of the principal back (Principal and Interest home loans) or just the interest (Interest Only home loans). Depending on your lender, individual loan terms and criteria, there may also be additional annual or monthly fees.
Most home loans in Australia have a monthly repayment scheduled by default – and often we find ourselves modifying our budgets and finance schedules to match this repayment frequency. But could you potentially save money by changing the frequency of your repayments?
Here we’ve put together a quick run-through to help you choose the mortgage repayment option that best suits your needs:
How often can you make repayments on home loans?
When you’re looking for a home loan, most lenders will show you what the monthly repayment will be on the amount you want to borrow. But some providers will offer you the option to make repayments weekly or fortnightly, depending on the type of loan you’re after. Others may allow you to make repayments more or less frequently, such as quarterly or annually, but monthly, fortnightly and weekly are the most common options you are likely to encounter.
After checking whether your lender offers the payment frequency you’re after, call your lender, head into a branch, or use an online portal (if your lender manages your loan online) to apply to switch your repayment frequency. Ask your lender whether it can calculate your fortnightly payments as half of a monthly payment, paid fortnightly (which could save you interest). Also be sure to check with your loan provider what (if any) fees, terms and conditions may apply if you are considering changing the repayment frequency on your home loan.
What’s easier – weekly, fortnightly or monthly?
All of the available repayment frequency options can be relatively straightforward to set up. Generally speaking, the process would involve contacting your lender to ask whether you can change your repayment frequency – or some lenders may provide the option to do so directly online. If you’re happy to make the switch, you could consider setting up a direct debit from your savings account to pay your lender a specified amount each week, fortnight or month as needed. Just be sure to double check that you’re covering at least the minimum repayment amount required by your home loan lender.
Your own financial circumstances may make one option easier than others. For example, if your pay cycle is weekly, it can make sense to set up weekly home loan repayments – scheduling each repayment to come out of your account the day after you get paid, in order to limit the chances of accidentally overspending. As with any financial decision, it’s important to always consider all of your different options based on your individual circumstances, and to seek professional financial advice from a fully licensed Australian financial advisor if you need it.
How can you save by changing repayment frequency?
Both weekly and fortnightly repayments can potentially save you money, when compared to monthly repayments. The biggest factor here is that interest on home loans is generally calculated daily – so the more frequently payments are made, the faster you chip away at the principal on your loan, which can help save you interest over the term of your home loan.
Another trick to help you pay off your loan amount faster is to switch to fortnightly repayments, paying the equivalent of half your usual monthly repayment amount each fortnight (if your lender will allow this):
- There are 12 calendar months in a year (which would equal 12 monthly repayments)
- With 52 calendar weeks, you would be making 26 fortnightly repayments
- By making 26 fortnightly repayments a year (at half your usual monthly repayment per fortnight), you are paying off more than you would if you made only 12 monthly home loan repayments per year
- This fortnightly system makes the equivalent of 13 monthly repayments in a 12-month period
Increasing your repayment amount is a proven way to pay off your loan quicker, saving you money. You could also have the option to switch to weekly repayments, at a quarter of your monthly repayment plan. This weekly repayment option would give you a total of 52 weekly repayments, the equivalent of one extra monthly repayment per year.
While you’re talking to your home loan lender, why not ask for a lower interest rate?
Chances are, we’re most often looking to switch loan repayment frequency because we want to save money. With interest rates at an all-time low and more low-rate home loan options available than ever, there’s no time like the present to ask your current home loan lender for a better rate as well. By switching to a lower rate, either with your current lender or refinancing to a new provider, you can potentially save tens of thousands of dollars in the long run.
Want to find out more? Our Homestar Mortgage Switching Calculator can help show you how much you could save by refinancing to a lower-rate home loan today.
Are there other benefits to making extra repayments?
Making extra home loan repayments can prove useful. Depending on whether your home loan lender offers this feature, you could be able to redraw on the extra repayments you’ve made over time, which can be handy if you need access to funds at short notice. Different lenders may charge fees, surcharges or additional costs for using this feature, so it’s always best to double check.
If you get ahead in your required repayments for a certain period, some mortgage lenders may also allow you to take a ‘repayment holiday’ where you don’t need to make any further repayments for an agreed period of time.
You can use Homestar resources like our Extra Repayments Calculator to help you work out how you could pay off your loan faster and save interest, by contributing different extra amounts to your usual loan repayments.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.