Cheaper long term to pay mortgage forth-nightly v Monthly?

vicwatson

Is there any savings, significant or other, by paying mortgage forth-nightly v monthly? Will banks allow it?

phormium

Depends on bank and how they calculate their interest and whether or not they will allow it, small saving to be made if you are just swapping 12 monthly payments for 24 fortnightly ones but a bigger saving if you are paying fortnightly by every two weeks as you will end up paying 26 payments per year so basically a full extra monthly payment as obviously not all months are exactly 28 days long.

Most banks I imagine at this stage calculate interest on a daily basis and apply it to the account either monthly or quarterly. With a daily calculation then there is some saving to be made as obviously you are prepaying half the payment two weeks ahead so the amount interest is being calculated on is slightly less.

vicwatson

phormium wrote: »

Depends on bank and how they calculate their interest and whether or not they will allow it, small saving to be made if you are just swapping 12 monthly payments for 24 fortnightly ones but a bigger saving if you are paying fortnightly by every two weeks as you will end up paying 26 payments per year so basically a full extra monthly payment as obviously not all months are exactly 28 days long.

Most banks I imagine at this stage calculate interest on a daily basis and apply it to the account either monthly or quarterly. With a daily calculation then there is some saving to be made as obviously you are prepaying half the payment two weeks ahead so the amount interest is being calculated on is slightly less.

Have checked with Bank and they say the interest is calculated daily and applied every 3 months.


Guy said it wouldn't take time off the mortgage but would cut interest paid over that time


Wonder if there a website I could calculate the savings on paying fortnightly over the remaining term to see what it would be worth ??

Anyone please?

phormium

Doubt he is entirely correct, if you continue to pay the same agreed payments but the interest charged is less over the term then the mortgage has to finish earlier! It would only stay the same term if the repayments were adjusted at some stage to take account of the lower balance.

Probably is some online calculators, let me have a look

phormium

I'm sure there must be an Irish one but I can't find it, most seem to show just monthly or lump sum overpayments. Here is an Aus one but might give some sort of a guesstimate if you just input your figures.

https://www.mortgagechoice.com.au/home-loan-calculators/fortnightly-repayments-calculator/

Sunrise_Sunset

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

If you pay fortnightly, you will be making 26 payments per year which equates to 13 monthly payments each year, rather than 12. This will reduce the term of your mortgage.

vicwatson

This is not what the bank are saying, again today I asked and the short answer was no, it wouldn't reduce the term, so I don't know.

zell12

Sunrise_Sunset wrote: »

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/
If you pay fortnightly, you will be making 26 payments per year which equates to 13 monthly payments each year, rather than 12. This will reduce the term of your mortgage.

Exactly. The term would be reduced and would save money, this US site gives an example
https://www.magnifymoney.com/blog/mortgage/5-reasons-you-should-make-biweekly-mortgage-payments/

phormium

If you just pay the monthly payment divided in two and pay that amount say 1st and 15th of every month rather than once a month then you will save a tiny bit in interest, if you pay half your existing monthly payment every two calender weeks that will result in 13 actual full monthly payments in the year so a bigger overpayment resulting in a bigger interest saving.

Any interest saving and assuming you at no stage decrease your monthly payments to take into account any saving you have made on interest then the mortgage term has to finish earlier than if you stuck to the exact contracted amount. The bank may not be able to tell you by how much and the listed term on the computer screen will remain the same but the fact is you cannot lose by doing this but really you need to be making an overpayment of some sort. Just splitting the existing payment into twice a month as opposed to paying same amount every two calender weeks is only going to make a small difference in the overall amount repaid.

daheff

It depends on how often they apply the payment to the mortgage account.

You might pay twice a month...but the bank might only apply funds to the mortgage account once a month...so interest would be accrued as originally agreed.

dotsman

Guys, there is negligible difference between paying fortnightly and monthly.

Where there is confusion, seems to be some people assuming that a fortnightly payment is exactly half a monthly payment - it is not. It is approx 6/13th of a monthly payment. Switching to Fortnightly would see you paying the same repayments on an annual basis, just spread over approx 26 fortnightly payments. Even then, there is not precisely 26 fortnights in a year. A year consists of 365 or 366 days. Different banks will apply different calendars when defining a "year" for interest calculations and loan repayments. But, in the end, it doesn't really matter how frequently you are paying unless using extreme examples (there would be a noticeable difference between a person paying weekly and annually, especially in the early years of the mortgage). But, ultimately, how much you are repaying per annum will be the big differentiator.

Sheep Shagger

dotsman wrote: »

Guys, there is negligible difference between paying fortnightly and monthly.

Where there is confusion, seems to be some people assuming that a fortnightly payment is exactly half a monthly payment - it is not. It is approx 6/13th of a monthly payment. Switching to Fortnightly would see you paying the same repayments on an annual basis, just spread over approx 26 fortnightly payments. Even then, there is not precisely 26 fortnights in a year. A year consists of 365 or 366 days. Different banks will apply different calendars when defining a "year" for interest calculations and loan repayments. But, in the end, it doesn't really matter how frequently you are paying unless using extreme examples (there would be a noticeable difference between a person paying weekly and annually, especially in the early years of the mortgage). But, ultimately, how much you are repaying per annum will be the big differentiator.

Negligible?

People have been paying mortgages fortnightly for years, for some bizzare reason it's not common and certainly not promoted by the lenders here (for obvious reasons).

When interest is calculated daily and you pay fortnightly, the amount the bank are basing your interest on is lower. The Australian calculator in a previous post above shows the thousands you'll save in interest costs....hardly negligible.

Personally have always paid fortnightly.

phormium

The Australian calculator I linked to assumes you are going to end up paying a full extra monthly payment per year i.e. 13 monthly payments spread over paying half the usual payment every two weeks so 26 half payments per year. This will give a decent saving as it involves overpayment.

Just dividing the exact 12 months of payments and paying that fortnightly will just be a small amount of interest saving, yes it's saving interest charged on half the amount of a monthly mortgage for half the month but it's still small enough.

The real saving comes from overpaying more than the contracted amount regularly and bumping up to 13 full mortgage payments a year, paying every 2 calender weeks results in 52 weekly payments divided by 4 gives you 13 payments so one months overpayment.

For example for simplicity lets say monthly payment is 600 euro due on 1st of month. Paying 300 on 1st and 15th of every month gives small saving and total annual payment of 7,200 as agreed (Saving of cost of interest on 300 for 14 days of month compounded as you go on but still not huge)

Alternatively if you pay 300 every two calender weeks you will pay 26 times a year so 7,800 total annual payment which is an overpayment of 600 on agreed payments which is reducing the capital quicker as well as saving some interest and will result in a much better long term saving of interest and length of mortgage.

dotsman

Sheep Shagger wrote: »

Negligible?

Yes, negligible.

Sheep Shagger wrote: »

People have been paying mortgages fortnightly for years, for some bizzare reason it's not common and certainly not promoted by the lenders here (for obvious reasons).

The obvious reason being that most people in Ireland are not paid fortnightly. Most are monthly, with some being weekly.

Sheep Shagger wrote: »

When interest is calculated daily and you pay fortnightly, the amount the bank are basing your interest on is lower. The Australian calculator in a previous post above shows the thousands you'll save in interest costs....hardly negligible.

The Australian calculator above does not show the difference between paying fortnightly or paying monthly. That is just how it is (terribly) described. What it actually shows is the affect of paying an extra month's repayment every single year.

Sheep Shagger wrote: »

Personally have always paid fortnightly.

Good for you. And if you are paid fortnightly, it makes sense. If you are paid monthly, then I'm afraid you are just kidding yourself if you think you have found some magical money-saving secret.

If you actually read my earlier post, you will understand why.

For a person paid monthly, they should stick to monthly repayments (ideally a few days after their payday). If they want to reduce their mortgage by overpaying, then they should talk to their bank about doing so.

vicwatson

Thanks for all the input, can't see why the BOI are saying it'll make no difference, think I'll have to write them a letter requesting it and asking them to outline potential savings in interest and time.

phormium

Maybe ask them if you make one extra payment per year as an overpayment what difference will it make to the term, they are more likely able to do that calculation easily.

If it is only your intention to pay the same amount each year but splitting it into two payments per month then I doubt if that sort of system is something they have handy whereas the other overpayment calcuation is one they would be using regularly.

dotsman

vicwatson wrote: »

can't see why the BOI are saying it'll make no difference

Because, as per my posts, paying "fortnightly" doesn't make a difference.

Making extra payments does. If you want to make additional payments, then you can, and that will reduce the term (thus savings in the long run).

jimmycrackcorm

dotsman wrote: »

Yes, negligible.


The obvious reason being that most people in Ireland are not paid fortnightly. Most are monthly, with some being weekly.


For a person paid monthly, they should stick to monthly repayments (ideally a few days after their payday). If they want to reduce their mortgage by overpaying, then they should talk to their bank about doing so.

Have to agree with this. It does make sense if you are paid fortnightly. Otherwise, it makes more sense to overpay to reduce interest. Essentially fortnightly payments are a technical variation of that.

Sheep Shagger

dotsman wrote: »

Because, as per my posts, paying "fortnightly" doesn't make a difference.

Making extra payments does. If you want to make additional payments, then you can, and that will reduce the term (thus savings in the long run).

We are essentially agreeing (I think!)...paying fortnightly is a form of overpaying your mortgage. A Bank should not be saying it won't make a difference as that is not true

Even 10 years ago when this was written it seemed some bank staff did not understand the concept.

https://www.irishtimes.com/news/consumer/change-the-date-for-big-savings-1.563221

Most banks won't let fixed rate customers make a lump sum repayment without some sort of penalty, they will however allow fortnightly repayments (achieving the same thing in the long run).

We actually get paid monthly but have always paid fortnightly.

Why anyone wouldn't pay fortnightly if they can manage it is odd to me (or stated another way anyone who can pay extra off a mortgage who can manage it is odd to me).

Shemale

This is a great site to calculate payments on loans and mortgages, including over payments

https://www.ccpc.ie/consumers/money-tools/

wench

Sheep Shagger wrote: »

A Bank should not be saying it won't make a difference as that is not true
https://www.irishtimes.com/news/consumer/change-the-date-for-big-savings-1.563221

And as was noted at the end of that article, the savings aren't from changing the payment frequency, but from overpaying.

Sheep Shagger

wench wrote: »

And as was noted at the end of that article, the savings aren't from changing the payment frequency, but from overpaying.

True, which are one in the same on this occasion.

dotsman

Sheep Shagger wrote: »

We are essentially agreeing (I think!)...paying fortnightly is a form of overpaying your mortgage.

I'm afraid not . To be perfectly clear - paying fortnightly is not overpaying your mortgage. Switching to fortnightly and increasing the amount you pay each fortnight is overpaying. Likewise, paying monthly and increasing the amount you pay each month is overpaying.

In your specific case, you could switch back to monthly and overpay and still spend the same each year and still make the same savings. The overpaying element is what achieves the savings, not the frequency.

Sheep Shagger wrote: »

A Bank should not be saying it won't make a difference as that is not true

But it is true. As per above, they are simply switching the frequency to fortnightly, which makes sweet fa difference. If the Op was to ask their bank to switch to fortnightly and pay extra, then it would. But they could just as easily leave it at monthly and ask to overpay.

Sheep Shagger wrote: »

Even 10 years ago when this was written it seemed some bank staff did not understand the concept.

https://www.irishtimes.com/news/consumer/change-the-date-for-big-savings-1.563221

Actually, it turns out it was the journalist that didn't understand the concept, and thus had to add the following amendment at the bottom of the article, admitting it had nothing to do with the frequency, and that it was the overpaying aspect is what generates the savings:

Irish Time Article Amendment Notice wrote:

* This article was amended on April 4th, 2011. In the original, it incorrectly stated such savings would come at no additional cost to the mortgage holder. While some small savings can be made by simply splitting payments from monthly to twice a month, they are small as the mortgage holder is not paying off the capital any faster .

The savings alluded to in the original piece only accrue because a person pays 26 fortnightly payments as opposed to 12 monthly ones, effectively making an extra four weeks’ payment each year, which should come off the capital. By switching to the fortnightly payment, a person can knock several years of a 30-year mortgage.

Let me use an example to try and make it clear. Let's say a person pays 1,000 per month on their mortgage. That is 12 x 1,000 = 12,000 per annum.

If they switch to fortnightly payments, they are still paying 12,000 per annum but the payments are spread out over every fortnight. They are not making any savings.

If they switch to fortnightly and overpay, resulting in paying 13,000 per annum, then they will make savings as they are overpaying by 1,000 per annum.

But they would make pretty much the same savings by paying the 13,000 per annum spread over 12 monthly payments.

It is the fact that they are overpaying by 1,000 per annum is all that matters, not the frequency.*

*The frequency does have a tiny miniscule impact, but you are talking a few cent (maybe a few euro) per annum, depending on factors such as when they get paid their salary, when they pay their mortgage, how big the mortgage is, what the interest rate is and how long the term is. But ultimately, any potential savings are negligible in the grand scheme of things.

Sheep Shagger wrote: »

Why anyone wouldn't pay fortnightly if they can manage it is odd to me (or stated another way anyone who can pay extra off a mortgage who can manage it is odd to me).

Again they are 2 very very different statements.

As to "why a person wouldn't overpay their mortgage if they can manage it", that is for another thread, as there are many, many reasons why it could be a poor decision (building life savings, increasing wealth, future cashflow, building pension etc). It really depends on the individual person and their circumstances. In fact, it is usually easier to approach it by asking "why would someone want to overpay their mortgage?".

Sheep Shagger

So if your monthly repayment is say €2k a month, that's total repayments of €24k pa.

Instead of that, you agree to pay the bank €1k every fortnight (so 26 times a year) so you are repaying €26k a year. I know you could just ramp up the monthly repayments to get to the €26k pa overall but some lenders may not allow this.

Given banks calculate interest daily on the reducing amount and you are overpaying by €2k a year, over the course of the loan term you will save more than a few euro.

I think we agree and maybe the way i worded ot maybe where the discrepancy lies?

dotsman

Sheep Shagger wrote: »

I know you could just ramp up the monthly repayments to get to the €26k pa overall but some lenders may not allow this.

Banks have no problem with this (assuming it is a variable mortgage). And far more likely to offer it and than fortnightly repayments.

Sheep Shagger wrote: »

Given banks calculate interest daily on the reducing amount and you are overpaying by €2k a year, over the course of the loan term you will save more than a few euro.

But you keep combining the "overpaying" and the "fortnightly" into the same thing. They are two completely separate things and one has nothing to do with the other. The fortnightly component will make a tiny difference, and is just as likely to be few euro more expensive than it is cheaper (and more likely to be more expensive for someone paid monthly, of which the majority of mortgage holders are)

Sheep Shagger wrote: »

I think we agree and maybe the way i worded ot maybe where the discrepancy lies?

But I get very worried that you keep combining the fortnightly aspect and the overpaying aspect and insinuate that their is a relationship between the two. They have nothing to do with each other. In your particular case, you moved your mortgage to fortnightly and also increased your payments. As a result, you think that the savings are a result of both actions, when they are only the result of the overpayments you are making. But the move to fortnightly was completely unnecessary. If anything, it is likely to be costing you a few euro per annum. Fortnightly is better for people who are paid fortnightly, monthly is better for people who are paid monthly and weekly is better for people who are paid weekly. It is the reason why banks offer different repayment frequencies for loans - to match the customer's pay frequency.

I'm not sure how I can make it any clearer than I have.

At his stage, I am just asking you to please trust me . I don't know what else to say other than I have numerous qualifications in both Finance and Technology and have spent my career predominantly in banking technology. I have worked on projects in 4 different banks and had imitate dealings with one other. The bulk of my time with banks has been focused on various lending systems. For the guts of a decade, I have been the lead engineer or solution architect of such solutions. The very systems that process the loans for millions of Irish people for more than a decade will have been analysed, designed & developed (to some extent) by me (and colleagues) and rigorously tested to the nth degree for all scenarios. This includes me specifically mapping out the mathematical loan calculations across all the scenarios and the sheer complexity of them (when boiling down to the nearest cent). I could go on forever about the nightmare that is trying to decide how many days are in an actual year which nobody can agree on (impacts the daily interest calculations), what form of rounding to use and when it should be applied (can make a sig difference on total values), how 0% interest is not necessarily so and of trying to illustrate out loans with multiple repayment frequencies & amounts at different stages of the term interspersed with adhoc bullet repayments.