Article by Lucy Pullen
Let’s talk about the least fun part of a home loan – paying the darn thing.
Something we get quite often in discussions with clients is some confusion about repayments and what we all expect they should be.
Questions like ‘how do I figure out what repayments will be’, ‘what’s the best frequency to repay my loan on’ and ‘are you really really really sure I need to pay the loan back’ are bandied about frequently. (The short answers to those, in order, are ‘With a calculator’, ‘As often as feels comfortable for you to do’, and ‘… yes. Please pay your home loan.’)
One really important thing to bear in mind is that banks are monthly monoliths. They charge your interest monthly, and because of this they also calculate their minimum repayments for monthly by default to ensure that you will be able to repay all the initial loan and the cumulative interest over the whole life of the loan. Makes sense, right?
When it comes to non-monthly repayments, things get a little tricky because unfortunately our months don’t all have the exact same amount of days in them and only February adds up to a neat four weeks! (And even then it misbehaves every four years)
Because of this we end up with two different ways to calculate your minimum repayments.
Way 1: “True” Minimum
You multiply your monthly repayments by 12 and then divide that figure either by 26 (if you’re paying fortnightly) or 52 (if you’re paying weekly) to make sure you pay your total yearly minimum to the exact cent!
eg. Monthly repayments are $3,500 and you want to pay weekly
$3,500 x 12 = $42,000
$42,000 / 52 = $807.69 per week’
Way 2: “Monthly” Minimum
You divide your monthly repayment by either 2 (if you’re paying fortnightly) or by 4 (if you’re paying weekly) to ensure your loan is never in arrears for what the bank expects to be paid each month.
Using the same scenario as above:
$3,500 / 4 = $875 per week or $45,500 per year
Now, we can see that Way 2 works out with you paying an extra $3,500 per year into the home loan.
However, in this instance that’s really not a bad thing! Ultimately, this means that you’re keeping interest costs down over the life of the loan.
That extra $70 odd per week from the very beginning of the loan can cut five years off your loan term (and we have another great blog you can read on that here)!
So, now to question two – how do you choose how often to repay your home loan?
If you can make weekly repayments, that’s great! While your interest is charged monthly, it’s calculated daily, so the more time you can have less owing the better.However, it all comes down to your own personal budgeting, and sometimes it’s more convenient to have it come out in sync with your pay cycle – as with the majority of decisions about your home loan, it has to come down to what works best for you.
If you want to chat with one of our brokers about your home loan or you have any questions, why not reach out to us using our contact form: Click here for that one