Twice monthly mortgage repayments - cheaper over time?

jon1981

Hi,

I heard that you can make some savings on your mortgage by switching to twice monthly standing order repayments. The logic is that interest is calculated daily, so by paying twice a month you are paying more frequently and reducing the principal more frequently and there reducing the amount of interest over time. Some amortisation calculators i have used show a reduction in term of 4-5 yrs.

Can anyone validate this? Also any have success with their bank to switch to this repayment model? So effectively I want to set up 2 payments a month (not biweekly).

I'm with AIB.

NIMAN

I'm with AIB and changed from monthly to fortnightly a couple of years ago as I too had read it was slightly cheaper.

tbh, I never really sat down and worked it out, but surely making 26 payments annually of half amount v 12 payments annually would mean you are overpaying and can only be a good thing (2 extra payments per year).

jon1981

NIMAN wrote: »

I'm with AIB and changed from monthly to fortnightly a couple of years ago as I too had read it was slightly cheaper.

tbh, I never really sat down and worked it out, but surely making 26 payments annually of half amount v 12 payments annually would mean you are overpaying and can only be a good thing (2 extra payments per year).

That's why I pointed out not bi-weekly in my post because I got mixed up with the two, paying 26 payments will obviously have a positive impact on the term

Twice monthly means paying 24 payments, two standing orders a month, so you're still paying back 12 months. I'm just wondering if this gives any meaningful gain.

vandriver

You might save the last payment on a 30 year mortgage.If a calculator is telling you 4 to 5 years,then it is doing fortnightly payments.

NIMAN

Are bi-weekly and fortnightly not same thing?
Surely you are making a payment every 14 days?
Or is fortnightly assumed to be making 2 per month, and hence 24 annually, which is same as 12 monthly?

vandriver

I read somewhere that americans don't use the word fortnight,so they use bi-weekly to mean the same thing.
My point was that if an online calculator is telling you about huge savings,then it is doing this with fortnightly payments of half the monthly mortgage,so it's only a form of overpaying.
Just paying half the mortgage twice a month,has only a small effect on the overall cost of a mortgage .

seamus

It can depend on the mortgage provider and how they structure your payments.

In general, yes you are saving money. I switched to bi-weekly payments with ICS and they explicitly told me that this would not reduce the term of the mortgage.

In reality what they did was reduce the amount of the repayment, so I still had a mortgage for the same term but the overall amount of interest paid was less, and as a result the capital repaid every two weeks was higher. But you're talking in terms of 1% of each repayment, not huge amounts in the short or medium term.

The overpayment arrangement which reduces the term of your mortgage is not in the providers' interest, so they're unlikely to voluntarily include it in their direct debits.
Nothing to say you can't set up your own standing order though.

NIMAN

What was handy in my case was that when AIB split my approx €700 monthly mortgage to 2 x €350, I found that a short time after we could afford to pay €400 fortnightly, so told them to up the payments to that, which would reduce the term quicker again.

AlexisM

jon1981 wrote: »

I heard that you can make some savings on your mortgage by switching to twice monthly standing order repayments. The logic is that interest is calculated daily, so by paying twice a month you are paying more frequently and reducing the principal more frequently and there reducing the amount of interest over time. Some amortisation calculators i have used show a reduction in term of 4-5 yrs.

Can anyone validate this?

Paying half your monthly amount twice a month rather than the full amount once a month has a negligible effect on the term - maybe a month or so at best.

Any claims/calculations of substantial interest or term savings assume fortnightly payment - so 26 half-months per annum (adding up to the equivalent of 13 months) rather than 12 full months.

NewDirection

You are effectively overpaying half a payment, for half the time of the length of your mortgage.

So by my calculations on a 100,000 mortgage for 20 years at 4%, you'd be paying 302.74 twice a month (total 605.48) as opposed to 605.98 paying monthly.

My reckoning is that you are essentially saving 302.74 @ 2% (4% for half the year) over twenty years, or about €445 over the lifetime of the mortgage.
(I'm not sure whether I have to take the 302 off that saving figure so I'd estimate the savings in time to be between 1 and 3 weeks of saving)

I'm missing a trick (I think it may only apply to the capital portion), because looking at the mortgage calculator making a single overpayment of €80 on the first month has the same effect as moving from monthly to twice a month. Seems like the simpler option to me!