Biweekly (or fortnightly) payments seem to be the fad of the moment. Everyone’s talking about how great they can be for paying your mortgage off faster. Some companies are even charging exorbitant fees to show you how good they can be for reducing your debt.

But do you know why they’re such a good idea?

Did you know there’s also a trap some banks can set for your bi-weekly payments that seriously STOP you from getting ahead?

We’re going to look at some of the good and bad points of biweekly (fortnightly) repayments and how they really can help you save thousands of dollars.

How the BiWeekly Method Works

Before we start trying to alter payments or avoid bank traps, it’s a good idea to understand how and why fortnightly payments work.

Let’s look at a simple example:

If your mortgage payment was $1,000 per month – then you would pay 12 payments per year, which is $12,000 per year. Easy, right?

Let’s say you decided to pay half your mortgage payment ($500) twice a month, then you would pay 24 payments per year, which still adds up to $12,000 per year.

Okay – instead of opting to pay once a month or even twice a month, let’s say you decided to pay half of your mortgage payment every second Thursday (or on the same day every second week), then by the end of the year you would have made 26 – not 24 – payments of $500 – which is $13,000 per year . That’s one extra payment per year coming off the amount you owe on your mortgage.

No matter what loan amount, if you work out your repayments this way, it will always come out as one extra payment per year.

The reason this works is because not every month has exactly 28 days in it. Grab a calendar and count how many Thursdays you see. Most months will have four. Some months will have five Thursdays (usually two months every year). The same should work for any day of the week you choose.

Does it Work Every Time?

Let’s look at an example mortgage. (We’ll base this on $250,000 at 6.5% over 30 years). Our minimum repayment for this mortgage is $1,580.17 per month. Over 12 months, we would have paid $18,962.04.

Now let’s cut the monthly figure in half. We will now pay $790.08 per fortnight (biweekly). If you pay the half monthly figure every second week for a year, you get: $790.08 x 26 fortnights = $20,542.08

(did you notice that it’s still exactly one extra payment per year?

$20,542.08 – $18,962.04 = $1,580.17)

So – if I put this new repayment amount into our mortgage calculator, it tells me that I could pay my loan off in 24.2 years – that’s almost 6 years off the loan term – and I could save $72,710 in interest, just by paying biweekly instead of monthly!

Every Cent Counts

Let’s see what kind of difference rounding up our minimum fortnightly payment by a few cents can make.

Minimum fortnightly (biweekly) payment = $790.08

Let’s round this figure up and pay an even $800 per fortnight. That’s only $9.92 per fortnight extra. Everyone should be able to afford an extra $9.92 a fortnight – gee, that’s only 0.70 cents per day!

Now we have the double benefit of paying biweekly payments, plus adding a few cents to the payment amount.

According to our mortgage calculator, your new loan term should be 23.4 years and you should have saved $81,200 in interest over the term of the loan.

Every cent really DOES help, doesn’t it?

Source by Lee Masterson