Check repayment calculations before borrowing

Mortgage holders shouldn’t assume that fortnightly repayments will save big bucks, because it actually depends on the lender and how it calculates interest, according to RateCity.

Of the big four banks, the Commonwealth Bank’s interest calculation methods return the best savings for fortnightly payments as opposed to monthly repayments.

RateCity chief executive officer Damian Smith said unless your lender credits you with 26 payments per year as opposed to 24, then fortnightly payments are pointless.

“It’s the difference between genuine fortnightly payments and twice-per-month payments,” said Smith.

Each lender calculates interest differently, so knowing who does what is important when determining a repayment frequency, he said.

ANZ, National Australia Bank (NAB) and Commonwealth Bank calculate fortnightly repayments by dividing a monthly repayment by two; ANZ and NAB only debit 24 fortnightly payments per year, or two payments per month while Commonwealth Bank credits payments every two weeks so borrowers make 26 repayments in one year and are credited for two extra fortnightly repayments each year, said Smith.

Westpac customers pay 26 times in one year, however it just equals the total amount if paid monthly, Smith said.

He said what it does do, however, is save on interest by reducing down the principal debt sooner each month, he said.

Smith compared the home loan repayments across the ‘big four’ lenders to discover some surprising differences.

“Using a scenario of $300,000 with an interest rate of 7.3 per cent over 25 years, Commonwealth Bank customers could save almost $77,000 in interest and reduce the length of their loan by four-and-a-half years by making fortnightly repayments as opposed to monthly,” said Smith.

“Using the same scenario, Westpac borrowers could save almost $7000, but ANZ and NAB customers would save less than $400 over 25 years.”

Borrowers should be careful when comparing home loans and ask for all the calculations and repayment details before deciding, said Smith.

“Lenders that only credit fortnightly payments as ‘twice per month’ rather than 26 times per year are essentially accepting money earlier from borrowers without rewarding them for the early repayments and pocketing the interest,” he said.

“That’s why it’s important for borrowers to check how their lender charges interest and credits repayments, and switch to a better deal if it doesn’t suit your needs.”

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