Have you paid attention to the repayment amount and interest rate while obtaining a loan? Most people focus on these aspects when applying for a mortgage. However, repayment frequency is another important factor influencing the amount of interest to be paid over the loan tenure.
Many borrowers choose the monthly repayment option for their loan. But, some lenders let you opt for fortnightly debt repayment. So, which is a better choice for repaying your loan? Read the blog to select the frequency of mortgage repayment.
How Does Repayment Frequency Work?
Most Australian financial institutions and banks, like ING online, calculate the mortgage repayment on a monthly basis. However, some lenders let you choose fortnightly payments for your debt.
Although it appears to be a minor adjustment, repayment frequency affects the total interest charged.
- Monthly repayments involve paying off the loan in 12 instalments in a year.
- Fortnightly repayments mean 26 payments every year. In other words, it is equivalent to 13 monthly loan repayments.
Pros of Fortnightly Loan Repayments
- Extra payments per year
- Significant interest savings
- Effective for the rising interest rate environment
Pros of Monthly Mortgage Repayments
- Improved cash flow and budgeting
- Ensure a structured financial plan.
- Reduce the risk of missed payments.
- Fewer transactions – Easier to track
Who Should Choose Fortnightly Repayments?
Those who want to reduce their debt early can go for fortnightly repayments. Besides, borrowers who have obtained variable-rate loans will benefit from adjusting repayment frequency.
How Does Payment Frequency Affect the Interest Paid?
For most borrowers, fortnightly payments will lower the total interest paid. Every payment will lower the principal balance. Thus, more frequent payments mean a lower principal balance. In other words, the interest accrued daily will be comparatively low.
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How to Choose a Mortgage Repayment Frequency
A few factors will help you determine if you should go for monthly or fortnightly repayments.
Budgeting and cash flow – For fortnightly repayments, you need more frequent cash flow management. On the contrary, those who prefer a less in-depth budgeting methodology choose monthly repayments.
Income cycle – The frequency of earnings will help you determine the repayment frequency. For instance, those who earn weekly can choose weekly loan repayment. Similarly, your fortnightly income cycle will encourage you to maintain that frequency for mortgage repayment.
Flexibility and loan terms – Some lenders offer a flexible repayment plan. But, many loan providers want you to stick to a particular timeline. So, you must check the loan term and decide the repayment schedule.
Interest savings – More frequent repayments will help you save on interest. Still, it is essential to select the right repayment schedule. Assess your financial status before confirming the repayment schedule.
Conclusion
Long-term goals, income schedule, and financial habits are key factors in choosing the repayment frequency. The fortnightly schedule will help you reduce your loan balance quickly. On the contrary, the monthly schedule provides a simple structure, which matches your billing cycles. You should understand how each option works and make an informed decision.
