Overpay mortgage or increase frequency of payments?

Zulu

Hi all,
looking for some help/clarity.

I "heard" that by repaying the mortgage bi-monthly is better that doubling the monthly repayment, could that be right?

Thanks.

phormium

Makes no logical sense, doubling your payments would reduce the balance much faster than paying bi monthly.

Zulu

Well the logic is that your interest is calculated daily, so your principle is lower for two week, thus interest calculate is lower...

...but then wouldn't your principle be lower for 4 weeks. I dunno. I'm confused.

MacGyver007

In a regular monthly-installment mortgage, a certain amount of your repayment pays off principal and the rest pays off the interest; in the early years of it you pay off mostly interest each month.

Making bi-weekly payments mean you make 26 payments annually, which is the equivalent of 13 monthly payments. The beauty of it is that the extra "month" you pay is applied directly to the principal, i.e. none of it is used to pay interest. Apply this over the lifetime of 20, 25, 30, 35 or 40-year mortgage and you see how much is saved in interest and how much earlier it is paid off.

phormium

When I said it didn't make sense I meant doubling your payments would give far greater benefit than paying twice monthly because you would be paying off double the amount each year.

If you pay twice monthly then you will save some interest and shorten the term of the mortgage but doubling the payments would have a far greater interest saving obviously.

In general there is just one mortgage balance, it is made up of capital and interest charged, interest charged increases the balance, payments made decrease it. There is no separate capital account and interest account, payments made whether the normal ones or extra paid in come off the overall balance and interest is charged on the new reduced balance.

Most banks calculate interest daily on the outstanding balance and apply it monthly to account, you will always save interest if you pay extra.

Doom

I don't know what a tacker mortgage is? :pac:

Zulu

phormium wrote: »

When I said it didn't make sense I meant doubling your payments would give far greater benefit than paying twice monthly because you would be paying off double the amount each year.

Apologies, I should have been clearer: I meant repay X*2 once a month, or pay X every 2 weeks.

So if my current repayments are €1000, am I better to repay €2000 monthly or €1000 every two weeks?

phormium

Makes much more sense now, so you are going to pay 2k a month regardless, well in that case if your lender calculates interest daily then you are better off paying 1k twice a month. If they calculate their interest monthly for example on the 1st of each month, then pay it 31st of previous month for maximum benefit.

uberwolf

there was an article in the paper about this last summer which promised great things but there was a retraction the following week. There remained a modest difference, but not all that much afair.

http://www.boards.ie/vbulletin/showthread.php?t=2056224551

my Bank would not accommodate the change when I rang them

Liam D Ferguson

uberwolf wrote: »

there was an article in the paper about this last summer which promised great things but there was a retraction the following week. There remained a modest difference, but not all that much afair.

http://www.boards.ie/vbulletin/showthread.php?t=2056224551

my Bank would not accommodate the change when I rang them

The confusion arose from the figures quoted.

If you pay €1,000 per fortnight, you're paying €26,000 in a year. If you pay €2,000 per month you're paying €24,000 in a year. That extra €2,000 each year makes a big difference.

The effect of making the payment approximately twice in a month rather than once, while beneficial on a mortgage where interest is calculated daily, is far less impressive.

Zulu

Thanks Liam D Ferguson, so am I right in saying the "real/big" benefit in fortnightly is when the mortgage is calculated monthly?

Liam D Ferguson

Zulu wrote: »

Thanks Liam D Ferguson, so am I right in saying the "real/big" benefit in fortnightly is when the mortgage is calculated monthly?

Yes - if you divide your normal monthly repayment by two and then start paying that amount every fortnight, you'll see big results, mainly because you're paying extra each year.

Tabnabs

uberwolf wrote: »

there was an article in the paper about this last summer which promised great things but there was a retraction the following week. There remained a modest difference, but not all that much afair.

http://www.boards.ie/vbulletin/showthread.php?t=2056224551

my Bank would not accommodate the change when I rang them

I think this may be the crucial factor here, at the time this first came to light in the media, most banks would not facilitate this change IIRC. I'd ring you bank first before getting too excited.

Zulu

well my interest is calculated daily, so it doesn't really have an effect - afaik

Liam D Ferguson

Zulu wrote: »

well my interest is calculated daily, so it doesn't really have an effect - afaik

It should. If you're paying €1,000 every fortnight instead of €2,000 every month, then after each fortnight, the balance of your loan has gone down by €1,000 so for the rest of the month, the amount of interest is being calculated on a slightly lower balance.

That's a different issue from the fact that there's 26 fortnights in a year instead of 12 months.

Oral Surgeon

Zulu wrote: »

well my interest is calculated daily, so it doesn't really have an effect - afaik

Liam D Ferguson wrote: »

It should. If you're paying €1,000 every fortnight instead of €2,000 every month, then after each fortnight, the balance of your loan has gone down by €1,000 so for the rest of the month, the amount of interest is being calculated on a slightly lower balance.

That's a different issue from the fact that there's 26 fortnights in a year instead of 12 months.

Why not pay daily then?? 2000/30= e67 per day....

Liam D Ferguson

Oral Surgeon wrote: »

Why not pay daily then?? 2000/30= e67 per day....

I'm not aware of any lender that will accomodate daily repayments on a mortgage. All of this discussion is academic if your lender won't facilitate your wishes.

Oral Surgeon

Liam D Ferguson wrote: »

I'm not aware of any lender that will accomodate daily repayments on a mortgage. All of this discussion is academic if your lender won't facilitate your wishes.

just messing.....:rolleyes::rolleyes: