How do mortgage repayments work?
Did you know that when you take out a mortgage, you can choose how often you wish to make repayments on your loan?
Mortgage repayments
When it comes to the structure of your home loan, typically you will have the option to repay your loan on a monthly, fortnightly, or weekly basis.
Your chosen payment frequency will determine the size of your repayments and the time it takes to repay your loan. This can be used as a strategy to potentially save you thousands in interest expenses over the life of your loan. Essentially, the more frequently you make mortgage repayments, the faster you reduce the principal, saving you interest.
To understand how mortgage payment frequency works, let’s take a look at the various options in more detail:
First, let’s assume you have a loan amount of $500,000 principal and interest loan bearing a variable interest rate of 4.24%, and a loan term of 30 years.
Monthly payments
Paying monthly is the most common way to pay off your loan. With the given example, your monthly repayments will be $2,457 with 12 payments each year totalling $29,484.
The total interest paid over the life of your loan based on our mortgage calculator, will be $384,438.
Fortnightly payments
Fortnightly payments require borrowers to make repayments every second week or twenty-six times a year. Fortnightly payments are calculated by dividing the monthly repayment by two.
Based on the example above, fortnightly repayments will be $1,228.39. The total interest payable is $321,723. Over the course of the loan, you would save $62,715 in total interest.
Weekly payments
Where fortnightly payments are paid every second week, weekly payments are made each week. Weekly payments are calculated by dividing the monthly repayment by the number of weeks in a month, being four.
Based on the example above, you would need to pay $614.25 every week, with 52 payments each year. Your total interest payable will be $321,388, allowing you to save $63,050 in interest compared to monthly repayments.
The table below shows a clearer mortgage payment comparison:
| $500,000 Mortgage | Monthly | Fortnightly | Weekly |
|---|---|---|---|
| Repayments | $2,457 | $1,228.50 | $614.25 |
| Total Interest Payable | $384,438 | $321,723 | $321,388 |
| Total Interest Saved | none | $62,715 | $63,050 |
The bottom line is, the higher the frequency of your repayments, the faster you can own your property, and the more you save on interest. You can easily calculate your own mortgage payments by using our online mortgage calculator.
Does home loan type impact mortgage repayments?
Principal and interest loans
This type of loan is the most common for borrowers across Australia looking to achieve their new home goals. With a principal and interest (P&I) loan as shown above, you make regular repayments on the amount borrowed (the principal), plus you pay interest on that amount. The loan is typically paid off the loan over an agreed period of time, for example 30 years.
P&I loans are generally cheaper in the long run when compared to interest-only loans given you are paying off both the principal and interest amounts at the same time. This typically results in higher mortgage repayments no matter the frequency that these repayments are made.
Interest-only loans
Another loan option is that of interest-only (IO). For an initial period, for example five years, your repayments only cover interest on the amount borrowed. This means you are not paying off the principal amount initially borrowed, so your debt isn't reduced. Repayments may be lower during the interest-only period, but they will go up once this period expires.
| Interest-only for first five years | Principal and interest | |
|---|---|---|
| Interest rate | 4.75% | 4.24% |
| Loan size | $500,000 | $500,000 |
| Loan term | 30-years | 30-years |
| Monthly repayments during IO period | $1,979 | n/a |
| Monthly P&I repayments | $2,851 | $2,457 |
| Total cost | $973,926 | $884,438 |
| Extra interest paid due to IO period | $33,329 | $0 |
Making extra repayments
Did you know that you can make extra repayments above the minimum? Paying extra, even if the sums are small, can make a huge difference over the life of your loan.
Let’s use our example above again, you have a 30-year loan for $500,000 at an interest rate of 4.24%. You opted for a monthly repayments and you start paying an extra $100 every month for after the first year of your loan. You could save $30,558.35 in interest and shave 2 years and 1 month off your loan term.
The accrued amount will be put into your offset sub-account. This is a loan feature with a sub-account linked to your home loan. You can access or redraw your money when you need it by using your Visa debit card connected to the account.
This facility also lets you offset its balance against your loan balance. So if you have $10,000 in your offset sub-account, and a loan balance of $100,000, instead of calculating your home loan interest on $100,000, it’ll only be calculated on $90,000, ultimately helping you save on interest.
Looking to break into the home loan market and need a home loan to get you there? Check out our range of home loan options or chat to one of our lending specialists to help get you started.
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About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
