Fortnightly mortgage repayments: the small change that can take years off your loan

Examples are illustrative: $600,000 loan, 5.00% p.a., 30-year term, principal and interest. Your numbers will differ.

Ask most people when their mortgage will be paid off and they’ll tell you “in 30 years”, or they won’t know. That’s because the bank sets the repayment when the loan starts, and most of us never touch it again.

Fortnightly repayments are one of the easiest ways to change that, as long as you set them up properly. Most people don’t.

Why fortnightly repayments work

There are 12 months in a year but 26 fortnights. Take your monthly repayment, halve it and pay that every fortnight, and you’ve paid 26 halves. That’s 13 monthly repayments a year, not 12.

The extra month goes straight off your principal. Less principal means less interest next fortnight, so more of your next repayment goes off the principal too. It compounds in your favour every year of the loan.

What it does on a $600,000 mortgage

That’s about 5 years sooner and roughly $100,000 less interest, for about $62 a week more than the bank’s fortnightly minimum. The repayment calculator will run your own numbers.

Switching to “fortnightly” doesn’t do it on its own

This is the part people miss. If you ask your bank to change from monthly to fortnightly, most will recalculate your repayment to the fortnightly minimum. On our example that’s about $1,486, which still pays the loan off in 30 years. You’ve changed when you pay, not how much.

What you want is to set the fortnightly amount yourself, at half your old monthly figure or more. You usually have to ask for that specifically, or set it in your banking app if your bank allows it.

Can you do this on a fixed rate?

Usually, yes, within limits. Most NZ banks let you increase repayments on a fixed loan by a set amount each year without a fee. The allowance varies by bank, so check yours before you change anything. Going over it can trigger a fee, and I’ve explained how those are worked out in mortgage break fees.

If you want to pay a lot more than the allowance, the better answer is usually to split the loan so part of it sits on floating, offset or revolving credit. You can pay as much as you like off that part. I cover that in how to pay off your mortgage faster.

When fortnightly repayments make sense

It suits you if:

• you’re paid fortnightly, so the repayment lines up with your pay
• the extra amount won’t leave you short when the car needs tyres
• you’d rather your money cut your mortgage than sit in a savings account earning taxed interest

Hold off if you’ve got credit card or personal loan debt at 15 to 20% or more. Clear that first. Every extra dollar does far more there.

Why it’s worth doing while rates are rising

The OCR has gone up twice since July, to 2.75%, and the next decision is on 28 October. If your rate goes up at your next refix, having extra principal already paid off makes the increase easier to absorb. I’ve written about timing that in refixing before the 28 October OCR.

Common questions

Read next

This article is general information only and isn’t personalised financial advice. Figures are illustrative and based on the assumptions shown. Mortgage Sense is a trading name of Yatin Kainth, a Financial Adviser (FSP1007497) providing advice under the Mortgage Managers licence (North West Group Holdings Ltd, FSP682791). See the Disclosure Statement.