How Bi-Weekly Payments Can Reduce Your Mortgage Fast

There’s been a lot of hype about bi-weekly payments and how they can help you to repay your home mortgage fast. There are even companies out there willing to charge you money to show you how it works.

However, once you understand how the principle of bi-weekly repayments works, you’ll soon see it’s easy to do it for yourself.

The logic behind paying your mortgage bi-weekly is simple: there are 26 fortnights in a year, but only 12 months.

Let me explain. If you pay your home loan repayment once a month, you’ll end up paying 12 payments in a year.

Yet, if you pay your mortgage on the same day every second week, you’ll end up making the equivalent of 13 payments in a year. After 12 months, you’re actually a full payment ahead.

This happens because there are actually 52 weeks in a year – not 48. Grab a calendar and choose any day you like. If you look through your calendar, you’ll see that some months have 5 Thursdays in them, not 4. This happens every year for any day of the week you choose.

However, if you make your new half-payment only twice a month, say on the 1^st and the 15^th, you’ll end up no better off. You only see the benefits of paying off your mortgage faster if you stick to paying on the same day, every second week. This is why they're called bi-weekly, or fortnightly, payments

You don’t need to work out any tricky sums or try to figure out how many weeks in a year to divide your payments into. Simply grab your usual monthly mortgage payment and divide it in half.

If you want to make your new bi-weekly payment amount easy to remember then round it up to a nice even number.

For example: if your monthly mortgage payment is supposed to be $994 and you divide this number in half, your new bi-weekly payment will be $497. Simply round up that amount to an even $500 that you’ll be paying every second week. You’ll remember this amount more easily and those few extra dollars won’t break the budget. You’ll also be paying this straight off your home loan principle, which helps to cut down on your interest costs too.

One of the biggest traps people fall into with bi-weekly payments is listening to their bank representative. Always keep in mind that banks are in business to make money. They’re not charities and they’re not doing things out of the kindness of their hearts. They train their staff to make the banks more money by charging you interest on your debts.

So if you call your bank and ask to have exactly half of your usual monthly payment taken out fortnightly, the representative may actually ask if you would prefer to make “true fortnightly” repayments.

They will take your usual monthly repayment and they’ll multiply it by 12. Then they’ll divide it by 26 fortnights and show you that figure.

Here’s the example:

Monthly payment = $1,000

Multiplied by 12 = $12,000

Divided by 26 fortnights = $461.53

Wow. That looks so much cheaper than paying $500 on a bi-weekly basis, doesn’t it?

But it’s a trap.

You see, if you paid $461.53 twice in one month, you would only be paying the bank $923.06. Yet, in the example, we already showed that the minimum payment was $1,000. This means you haven’t kept up with your minimum payment amounts, so the bank may charge you overdue fees and penalty fees because you’re in arrears.

So don’t fall for this. Take your minimum amount due and divide it in half. Then pay this every fortnight, or bi-weekly, on time – every time. Your statements will show you that you’re really making headway on reducing your home mortgage much faster.