You are Better Off Calculating Your Own Repayments
A mortgage calculator is an excellent tool for working out all kinds of information. You can use it to work out your minimum monthly repayments or to see the effects of paying extra into your mortgage. A good calculator can also be great for determining how long it will take you to pay off your home loan based on the payments you're already making. You can even use some calculators to see the effects of amortisation on mortgages, if that kind of thing interests you.
The problem with many mortgage calculators available is that they are usually created around monthly repayments only. If you intend to change your payment schedule to fortnightly repayments, you may find that the results you get can vary widely.
Fortunately, you don't need a fancy calculator to work out how much your fortnightly repayments will be. Grab a regular old desk calculator and enter the following information into it:
Monthly Repayment divided by 2 = Fortnightly Repayment
So if your normal monthly payment amount is £1,000 you want to change your payment frequency to fortnightly and pay £500 on the same day every second day. For 10 months of every year, you'll pay 2 payments of £500, which adds up to the same amount as your regular £1,000 monthly payment anyway. However, there are usually 2 months of every year where you squeeze an additional fortnightly payment in there.
Grab a calendar and take a look for yourself. If you intend to make your payments every second Thursday you'll see that some months of the year have 5 Thursdays in them instead of 4.
The Problem with Some Mortgage Calculators
If you're doing anything more complicated than dividing your monthly payment amount by 2, you're doing it wrong. Far too many people try to get clever with their calculations. They believe they need to multiply their monthly payment amount by 12 months, and then divide that amount into 26 fortnights in order to reach the real figure they need to pay.
Unfortunately, many of the calculators available online will re-create this formula automatically. As a result, the amount you end up paying may not be what your bank expects.
Don't fall into this trap. If you try to complicate your calculations and formulas, you'll end up getting almost no benefit at all for switching over to fortnightly payments anyway. Here's how it looks if you calculate 'true fortnightly' payments.
£1,000 monthly payment x 12 months = £12,000 divided by 26 fortnights = new fortnightly payment of £461.53
Remember, the bank is expecting you to pay a minimum of £1,000 each month. If you paid £461.53 twice a month, you'd only be paying £923.06 during that month. Your bank is likely to charge you penalty fees for not keeping up with the amount they expected. You may even find you incur late payment fees as well.
The easiest way to avoid those types of penalties and fees is to ensure you're paying the right amounts each fortnight. Call your bank and nominate the repayment amount you want to make. Don't let a bank representative to do the calculations for you, just in case they try to be tricky about their formula.
Additional Benefits of Making Fortnightly Payments
If your bank expects you to pay £1,000 per month on your repayments, you'll end up paying £12,000 by the end of the year. By comparison, if you pay £500 per fortnight for the next 26 fortnights, you'll end up paying £13,000 by the end of the year.
Effectively, increasing your payment frequency puts you one full payment ahead each year. The same principle applies no matter how much you owe or what your minimum repayment amount is. As long as you divide that figure by 2 and pay that amount you'll be one full payment in front after the first year.
You also have the advantage of reducing how much interest you pay, simply because banks calculate interest on mortgages daily on your outstanding balance. When you increase how often you make your payments, you reduce your balance a little more. The result is that you pay less interest overall, which means more of your money goes towards reducing your debt.
What You Need to Know
Amazon Price: $24.95 Buy Now
(price as of Nov 11, 2013)