Home Loan Repayment Frequency Question

• 

  jason andrade on 29/05/2017 - 22:16

  +1

  I have had a brief look at the WBC calculator and it looked OK to me.

  If you look at the principal & owing in years 5, 10 and 20 doing monthly repayments vs fortnightly you'll see they have different amounts.

  I'm assuming it looks very similar in year 1 because of how much interest is involved vs paying off the principal ?

  The model of 'pay fortnightly' rather than 'monthly' is simply a point of view though that assumes you can only pay on a fixed cycle basis (e.g. people who have very tight budgets and need to have this planned out). If you can get a (100%) offset account or otherwise bank your entire salary into your mortgage and then slowly take out what you need it changes the numbers even more significantly than the option between paying fortnightly or paying monthly..

  Also remember that a mortgage might have two separate cycles running that way.

  1) When you put the money into the mortgage
  2) When the bank cycle takes the money 'out'

  It's always in your interest (ha!) when the mortgage is high to try to put every cent of spare cash you have to 'sit' in your mortgage as you are not only getting a rate of return that is your mortgage interest rate but it can be a lot more than that from a tax effective POV (you pay 0% tax on the effective 'income' you get by leaving money in your mortgage.. )

  • 

    John Kimble on 30/05/2017 - 03:33

    Yes, we have a 100% offset account with our HL. My wife is saying we should also change to fortnightly repayments to get the benefit of that too and I was just trying to see the potential difference when I stumbled on the calculators not showing the same results.

    • 

      dasher86 on 30/05/2017 - 08:36

      +3

      if you have a 100% offset account and you are already putting all your funds into it then there is no added benefit to switch to fortnightly payments.

      • 

        John Kimble on 30/05/2017 - 08:40

        That's what our broker and our bank said, but my wife was using one of these calculators as evidence it would make a difference e.g. 26 years vs 30 years…I told her it's because she is using a calculator that doesn't take into consideration an offset account, but she couldn't understand what difference it makes, still sure that if we paid fortnightly, we should be making more repayments and therefore paying off the loan quicker and saving on interest in that way.

        https://files.ozbargain.com.au/upload/190487/49393/stg_fortn…

        So then I showed her this one: https://www.ingdirect.com.au/home-loans/calculators/offset.h…, which indicated no difference hence our confusion.

      • 

        dasher86 on 30/05/2017 - 08:43

        @John Kimble:
        the only added bonus i see about making repayments whilst having an offset account is the mentality that once it is in the home loan it cannot be used.
        if it is sitting in the offset account i can be used.
        one of the biggest mind tricks the banking industry has done.

        but yes those calculators don't take into account offset.

        also on the screens you have shown - 5.00% vs 5.42% loan period is also different.

      • 

        conan2000 on 30/05/2017 - 09:14

        +2

        @John Kimble:

        As per the other comments, the only difference here is mentally (when a 100% offset account is being used). You won't actually save anything, but you'll clear the loan quicker, it's just the difference between having paid off the mortgage rather than having money sitting in an offset account.

        As an example, if I have a mortgage of $100k and $100k in my offset account as well, I could clear the mortgage whenever I want. But I'd rather have the cash and just slowly pay off the mortgage each month. Fortnightly payments would mean I'd clear it quicker, but there's no actual difference to the interest I pay ($0).

      • 

        John Kimble on 30/05/2017 - 09:48

        @conan2000: Yep, I get that for your example. For us, we don't have a dollar to dollar match of our loan in our offset though. So technically if we paid off our loan sooner whether it be via fortnightly over monthly repayments or adhoc extra repayments, we should save on interest because the loan would be repayed more quickly, right? Just like the STG and BOQ calculators indicate?

      • 

        conan2000 on 30/05/2017 - 22:23

        +2

        @John Kimble:

        No you wouldn't save anything if all of your money is in the offset account. Consider those extra repayments you will be making will just sit in your offset account instead of paying down the mortgage. So as a different example,
        - you start off with $100k mortgage and $5k in your offset, you will pay interest on $95k.
        - if you get a bonus of $5k, you can keep it in your offset taking it to $10k, now paying interest on $90k.
        - alternatively you pay it off the mortgage, reducing it to $95k, with $5k in offset, so you'd be paying interest on $90k. Exactly the same.

        If you aren't keeping all of your money in an offset account, then you will save on interest by making extra payments, but if you are, then there is no interest saving. You just get piece of mind that you have paid off the mortgage sooner.

        I haven't looked at the calculators, as online calculators will only give approximations based on several assumptions anyway.

• 

  Cheapo333 on 29/05/2017 - 22:57

  +1

  You are right! I did a quick calculation on an Excel spreadsheet for you.
  Westpac and ING use 26 payment periods per year, whereas St George and BOQ use 12 payment periods per year to compute monthly payments, and divide this by 2 as an approximation.

  Open an excel spreadsheet. Put in the following formulas and it will make sense.

  Fortnightly payment
  =PMT(0.05/26,30*26,300000)

  Monthly payment divided by 2
  =PMT(0.05/12,30*12,300000)/2

  • 

    John Kimble on 30/05/2017 - 04:40

    But why don't the WBC and ING calculators reduce the time it would take to pay off the loan when you change from monthly to fortnightly in their calculators? The STG and BOQ ones drop a few years.

    • 

      Cheapo333 on 30/05/2017 - 19:01

      +1

      Bluntly, St George and BOQ calculators are wrong for the fortnightly repayment.
      There is a mathematical formula for repayments which is just manipulating the geometric progression formula which everyone learnt in year 9.
      It is also just rearranging the annuity formula which I show below:

      PV = Repayment x ((1 - (1 / (1 + r) ^ n)) / r) x (1 + r)
      Repayment = PV / [((1 - (1 / (1 + r) ^ n)) / r) x (1 + r)]

      PV = present value (loan amount)
      r = annual interest rate / number of annual payments
      n = total number of payment periods

      Instead of applying this formula in the calculator for fortnightly repayments, they incorrectly assume fortnightly repayment = monthly repayment/2.

      Why you ask? Because they are stupid.. that's why!

      • 

        John Kimble on 30/05/2017 - 19:21

        +1

        Thanks for the detailed explanation. I'm a bit slow.

        https://youtu.be/5FEW5mh7iAI

      • 

        Cheapo333 on 30/05/2017 - 19:46

        +1

        This is what I say to people who think maths is useless when you have calculators available.
        https://www.youtube.com/watch?v=fn4jIlFwuLU

      • 

        John Kimble on 31/05/2017 - 07:07

        @Cheapo333: I was out of my depth there!

• 

  [Deactivated] on 30/05/2017 - 06:18

  +1

  Take out a 30 year loan paying fortnightly, or take out a 30 year loan paying monthly, will both still take you 30 years. Reminds me of the old riddle: What weighs more? a pound of feathers or a pound of lead?

  • 

    John Kimble on 30/05/2017 - 07:07

    According to the WBC and ING calculators, yes. According to STG and BOQ calculators, no.

    • 

      [Deactivated] on 30/05/2017 - 07:22

      Look at the repayments of both types of calculators as fortnightly and monthly - there's your difference. And that's the secret of owning your home sooner, put more money towards it.

      • 

        John Kimble on 30/05/2017 - 07:32

        I have looked at all four calculators and selected monthly and fortnightly.
        Have you? Do you understand my question or is it not clear? I can post screenshots if it is not clear.

      • 

        [Deactivated] on 30/05/2017 - 07:35

        Your questions not very clear. Do you only want to know why these calculators are giving different results?

      • 

        [Deactivated] on 30/05/2017 - 07:45

        +1

        Using your values and comparing WBC and STG. Monthly, the repayments are the same: $2684.11. Fortnightly WBC = $1238.22 over 30 years and STG = 1342.05 over 28 years. Of course if you pay more your home will be paid off sooner but WBC has the correct repayment calculation. STG are pulling a swiftie.

      • 

        John Kimble on 30/05/2017 - 07:45

        @PhilThis: Apologies then. Essentially, yes. I've added some screenshots.

        I can see there is a different fortnightly amount coming out between the two examples provided WBC and STG, but I don't understand why they would be different.

        Is it really reflective of what would happen if you took a loan out with those banks, or it is just simplistic calculators that are using different formulas (as per Cheapo333's post https://www.ozbargain.com.au/comment/4730872/redir)?

      • 

        [Deactivated] on 30/05/2017 - 07:53

        Banks are full of crap and will say anything to get your business and then really don't care about you afterwards. Monthly or fortnightly repayments only make a slight difference. According to the WBC calculator, less than $500 over 30 years. Just choose the one that fits in with your lifestyle.