Paying a mortgage weekly or fortnightly rather than monthly ?

iMax

Was having a conversation with someone today about the recent PTSB hike - got the letter to tell us exactly how much it would be :eek:

Anyway. They recommended that we switch to paying weekly or fortnightly as it would reduce the term of the lone & therefore save thousands.

Because the interest is calculated daily, it accumulates & you pay interest on the interest, but if you pay weekly (as the most efficient way of doing it), you still pay the same amount over the year but you are reducing the principle quicker & so reducing the interest due.

Any opinions ?

3DataModem

Yes, if you pay twice monthly then half your payments are made 2 weeks earlier.

So if you have 200k of outstanding payments (not balance) and an interest rate of 4% per annum:

100k of payments paid 1/25th of a year earlier
100k x 4% x 1/25th = 160€ saving.

murphm45

It seems like a loty of hassle for nothing. if you determine the weekly repayments by multiplying the monthly one by 12 and dividing by 52 ( and remeber every 7 years you'll have to make 53 payments in a year!), the term reduction will be miniscule (only a couple of months)

Also, you'll need top be aware of the immediacy of the effect when you switch from monthly to weekly. You're first payment will need to be a week later to get the benefit of it (i.e if your next monthly payment is due on 1st april you'll have to pay your weekly ones from the 8th).

tantipie

does anyone know how this works,,just listening to Conor Pope on Ray D'arcy show and he sats if you pay your mortgage in 2 seperate payments over the month then your saving about 50,000 in interest over the 30 yrs,,does anyone else do this and if so do you just ring the bank and ask them to split the payments???sorry if this is in the wrong forum:)

Richard tea

I just listened to Conor on Newstalk ( well bits of the interview, 3 year old making a racket:o ) Can anybody explain in more detail what Conor was saying

snubbleste

This has come up before. Interest is calculated daily.
You now pay your mortgage every month, 12 payments a year.
Tomorrow you pay your mortgage fornightly, reducing the number of days in which interest accumulates or reduce the amount of mortgage remaining in the second part of the month. You end up paying more off the mortgage in a year, which over 30 years which adds up to the savings.

Richard tea

So basically I will end up paying one extra payment per year. I see now, thanks Snubbleste

daveyboy_1ie

Did this about a year ago with our own mortgage and cut our term by nearly four years, by only a simple smallish increase in payments and payment dates. Basically the way it was explained to me is this, as long as you pay the due amount minimum for the year you can plan your payments as often as you like and how much you like, once its equal or above the due amount. So say your mortgage was €1,000 a month, for the year that means €12,000 is due.

If you change the payments to twice a month and €500 each time, that is €13,000 for the year (€500 * 26) and so you are accelerating the payments a month for every year of full payments. Whats more, the excess is paid directly off the principal of the loan, and is not interest payments. Effectively you are reducing the value of the loan every year by €1,000 compared to your original schedule and and thus paying less interest on the loan. You are gaining two ways, your mortgage is being paid off faster by €1,000 a year and also you pay less interest overall. This might not sound important when you owe say €300,000 but the maths still work out when you apply it to your own situation.

The added bonus of course to me is a bit of breathing space if things change with income levels, because we are ahead of our original schedule we can just write to the banks again and go back to original schedule and depending on when it happens we will hopefully be a good bit ahead of plan. As I said once you pay the minimum amount due the banks have no problems with you changing amounts and payment dates.

Just seen the earlier explanation and it was explained much better than mine

Officer Giggles

I only caught the end of the ray darcy interview so went and bought the times, you pay the same amount every month but in two payments so the interest in the second half of the month is less, he goes on to say that if you pay it every two weeks you will end up making 26 payments in the year as opposed to 24 if you go twice a month there by paying your mortgage off quicker and saving more money, mortgage brokers should be ashamed of themselves not informing their clients about this

Richard tea

Officer Giggles wrote: »

I only caught the end of the ray darcy interview so went and bought the times, you pay the same amount every month but in two payments so the interest in the second half of the month is less, he goes on to say that if you pay it every two weeks you will end up making 26 payments in the year as opposed to 24 if you go twice a month there by paying your mortgage off quicker and saving more money, mortgage brokers should be ashamed of themselves not informing their clients about this

My mortgage broker advised me not to go for a tracker:(

Ill definitely get onto my bank and change repayment dates now. Hope they dont pull any ( we cant do that ) lark.

Officer Giggles

Conor pope rang most of the banks and some of them don't mind doing it but others said they didn't have the facility to take two direct debits in one month so you would have to set up a standing order for the second payment however if the interest rate was to rise then you would have to manually change the standing order yourself as the bank wouldn't be able to

Abelloid

daveyboy_1ie wrote: »

Did this about a year ago with our own mortgage and cut our term by nearly four years, by only a simple smallish increase in payments and payment dates. Basically the way it was explained to me is this, as long as you pay the due amount minimum for the year you can plan your payments as often as you like and how much you like, once its equal or above the due amount. So say your mortgage was €1,000 a month, for the year that means €12,000 is due.

If you change the payments to twice a month and €500 each time, that is €13,000 for the year (€500 * 26) and so you are accelerating the payments a month for every year of full payments. Whats more, the excess is paid directly off the principal of the loan, and is not interest payments. Effectively you are reducing the value of the loan every year by €1,000 compared to your original schedule and and thus paying less interest on the loan. You are gaining two ways, your mortgage is being paid off faster by €1,000 a year and also you pay less interest overall. This might not sound important when you owe say €300,000 but the maths still work out when you apply it to your own situation.

The added bonus of course to me is a bit of breathing space if things change with income levels, because we are ahead of our original schedule we can just write to the banks again and go back to original schedule and depending on when it happens we will hopefully be a good bit ahead of plan. As I said once you pay the minimum amount due the banks have no problems with you changing amounts and payment dates.

Just seen the earlier explanation and it was explained much better than mine

That's bi-weekly, not twice monthly, on two months in the year you will make three payments. You are in effect making one extra monthly payment per year, but what if you choose to make payments of €500 on the 1st and 3rd Friday of each month for example, you are still making 12 monthly payment albeit split into 24.
Is there a big interest saving to be made this way?

robin3

Conor Pope talking about this this am on the ray D'arcy show.
Anyone tell me if I could still benefit from this if I'm on a fixed rate?

Cookie_Monster

Do it if you can, makes a lot of sense.

Also be aware you will be making 26 payments a year if fortnightly as opposed to 12 monthly ones so you will be paying off more per years as well as catching the interest sooner, so a double "saving" over the life.

az2wp0sye65487

Firstly, apologies if this is in the wrong forum, but I couldn't find anywhere more suitable.

Just read the following article this afternoon and thought it was very interesting. Would welcome any thoughts....

http://www.irishtimes.com/newspaper/pricewatch/2011/0404/1224293731588.html

MORTGAGE REPAYMENTS: HOW WOULD you like to knock as much as 20 per cent off the cost of your mortgage without breaking a sweat? Believe it or not, it can be done – and it is not hard – yet for reasons that are beyond us, virtually no one is doing it.

Irish consumers are conditioned to pay their mortgage on a monthly basis but this can cost a lot of money. If, instead of paying monthly, you pay your mortgage every two weeks then you could easily dramatically cut its cost over the full term.

If someone has a €300,000 mortgage taken out over a 30-year term and they make a monthly repayment, it will cost €1,610.46 every month, based on an average interest rate today.

If they pay twice a month, it will cost them €805.23 each time. So they are paying exactly the same amount every month.

But when a person pays monthly, the total interest on that loan over the full 30 years is €279,767.35 or €777.13 a month. If, however, that person pays off the mortgage twice a month then the total interest falls to €226,466.56 or an interest payment every bi-weekly period of €289.60.

The reason the interest falls so substantially is very simple.

Most banks calculate mortgage interest on a daily basis. If you owe €100,000 and pay off €1,000 monthly, a bank will calculate the interest owed on the full amount of €100,000 at the end of that first month. But if you pay off €500 every fortnight, then for the second half of that first month, the amount of interest you pay is less because for two of the four weeks, the capital owed is €99,500.

Spread that over the 30 years and the savings really mount up.

“The mortgage holder could knock almost €54,000 off the cost of their loan,” says Frank Conway, director of moneycoach.ie.

“The interesting thing here is that they continue to pay the same total sum per month but they will reduce the term of the loan as they pay it off sooner with the faster rate of interest repayment.”

There is a way to save even more money following much the same principle.

If, instead of paying off monthly or even twice a month, you pay your mortgage every two weeks, it will be cleared even faster again.

If your monthly repayments are €1,000 you pay off €12,000 a year in 12 instalments.

If you pay €500 every two weeks however, you end up making 26 payments each year which is €13,000 a year. The extra amount comes directly off the loan principal which reduces the amount on which any future interest is going to be calculated.

Because the interest is less, the more of each future repayment goes towards the principal which means that the interest is less and before you can say “negative equity, what’s that?” your mortgage has been cleared. In this scenario you will pay a little bit more, admittedly, but it could be worth it to cut years off the term of your mortgage.

“Because of the way people get paid, they tend to just pay monthly and the banks are happy to take monthly repayments because it cuts down on their administrative costs,” says Karl Deeter of Irish Mortgage Brokers.

He says switching to twice monthly payments makes sense. “It is a cracking idea if your bank will let you do it.” We contacted the banks to see if they have any issue with people switching from monthly payments to twice-monthly ones.

What was interesting was that none of the bank officials and spokespeople we contacted seemed aware of the potential savings that could be made.

By and large, the banks said it would be okay to move to twice-monthly payments.

Hardly surprising as it can help them raise capital more quickly. And if there is one thing Irish banks need, it’s capital.

Ulster Bank says customers can pay off their mortgage as often as they like, although they will not accept any more than one direct debit payment a month. Similarly with KBC. It said its customers could pay their mortgage monthly as is normal practice but said it “offers customers the option of making additional payments to their mortgage on an adhoc basis as a lump sum or an extra monthly repayment in addition to their scheduled monthly repayment”.

Permanent TSB allows its customers to switch to twice-monthly payments but the bank says it cannot handle direct debits twice a month so customers would have to cancel their direct debit and set up a standing order in its place. The problem with standing orders, however, is that they are for fixed amounts which cannot be changed by the bank so should interest rates rise – and interest rates are going to rise – it will be the responsibility of the mortgage holder to change their direct debit. For its part, Bank of Ireland says its customers could pay their mortgages on a fortnightly basis.

“If a customer wishes to do this they must send a request in writing to the bank, signed by all parties,” a spokeswoman said.

AIB says there was no problem with twice-monthly payments either.

Another option for people who want to cut the cost of their mortgages, is to take out a 30-year mortgage but pay it off over 15 years. It is hardly surprising that sounds painful, because it is. But, according to Conway, it is not, perhaps, as painful as you might imagine. He says most people think that if they cut the loan term in half they will double their repayments but that is not the case.

Let’s say you have a €300,000 mortgage and are paying a rate of interest of 5 per cent. “Paying on a 30-year term, the monthly repayment is €1,610.46,” Conway says. This means the total cost of the interest is €279,767. Paying on a 15-year term, the monthly repayment is €2,372.38, so the total cost of the interest is €127,028 ”

So, buying the same home with the same rate of interest on the mortgage to finance the purchase, a customer taking out a 30-year mortgage but paying it off over 15 years can save themselves €152,737 in interest charges. The house costs them almost €153,000 less than financing over a 30-year term although they do pay 47 per cent more per month which may be hard for a lot of people to stomach in the current climate.

I know what a tracker is . . . so I’m keeping it

The big question many people might have about switching to different payment dates is what impact it could have on their precious tracker.

Banks are using – or are at least trying to use – all sorts of spurious reasons to move people off tracker mortgages because they are cost the banks money. And if there is one thing our banks do not have right now, it is money.

Trackers became hugely popular in this country after the Bank of Scotland arrived in the late 1990s and started throwing them around like confetti at a wedding.

Irish lenders were terrified they would lose market share to the interloper and introduced tracker deals of their own, some of which were ridiculously generous.

At the height of the boom, trackers for less than one per cent over the European Central Bank base rate of lending were available.

Irish banks are now charging some consumers a rate of less than two per cent for money which is costing them over five per cent to borrow, which is why many are using the most flimsy of pretexts to try and convince people to surrender them.

The bottom line is that consumers who ask to switch to twice-monthly payments, instead of monthly ones, are under absolutely no obligation to abandon their tracker and any bank who even mentions that as a possibility should be roundly condemned.

Officer Giggles

There's another thread about this titled 20 percent drop in mortgage interest relief or something to that effect, should be near the top of the thread list

murphm45

The benefit is miniscule and more hassle then its worth. the article in the Times (link below) says that yoiu can save 54k a year by paying half the amount twice monthly instead of once at the end. This would reduce the payment term by over two and a half years :eek:

This is wrong! If you follow the "strategy" outlined you'll save about 600 (that's right six hundred Euro!). the reason is all you are saving is the interest that would accrue on the new half monthly payment for half a month. in effect all you're saving, based on the example in the Times, is 805*.0511*30/2. (5.11% is the APR in his example 805 is half the montly payment and 30 years but you'll only getting the benefit fo half each month which is why its divided by 2)

Just shows not to believe everything you read! That said there suggestions re uping the payment are correct though.

http://www.irishtimes.com/newspaper/pricewatch/2011/0404/1224293731588.html

Officer Giggles

Where is the 53000 figure coming from then

dudara

Moved to Banking & Insurance & Pensions

dudara

snubbleste

'journalist' makes error shocker

greenasgrass

I read this earlier. Very interesting.

I get paid fortnightly so would work very well for me.

Anybody had any success with this?

Will try the bank (AIB) later on. Will let you know how I get on.

Richard tea

JustinOval wrote: »

That's bi-weekly, not twice monthly, on two months in the year you will make three payments. You are in effect making one extra monthly payment per year, but what if you choose to make payments of €500 on the 1st and 3rd Friday of each month for example, you are still making 12 monthly payment albeit split into 24.
Is there a big interest saving to be made this way?

Bi-weekly, twice monthly I was onto my bank and I can change my repayments by simply sending them in a letter of request. Not sure how to word it though:o The guy from the bank mentioned that its not widely advertised but I can do it. Do I request a change to Bi-weekly, twice monthly and do I have to state that I want it payed off the principal ammount

murphm45

JustinOval wrote: »

That's bi-weekly, not twice monthly, on two months in the year you will make three payments. You are in effect making one extra monthly payment per year, but what if you choose to make payments of €500 on the 1st and 3rd Friday of each month for example, you are still making 12 monthly payment albeit split into 24.
Is there a big interest saving to be made this way?

No. You'll only save a couple of hundred euro, all you save by doing this is the interest on the interest for those half months, depending on the term and size you mihgt make one or two less payments.

From a money saving point of view it's probably not worth it but obviously it's your decision (it might be easier depending on your scenario to pay this way for budgetting purposes)

Officer Giggles wrote: »

I only caught the end of the ray darcy interview so went and bought the times, you pay the same amount every month but in two payments so the interest in the second half of the month is less, he goes on to say that if you pay it every two weeks you will end up making 26 payments in the year as opposed to 24 if you go twice a month there by paying your mortgage off quicker and saving more money, mortgage brokers should be ashamed of themselves not informing their clients about this

IF the savings were as significant they wound but the fact is they're not). The reason most mortgages are structured with monthly repayments is beacuse most people are paid monthly and it better helps budgetting on a personal level e.g if you're paid 1,500 a month a monthly amt of 1k is a lot easier to manage than some months with 920 and others with 1380 (12,000/26 = 460). Personally i think brokers are @rseholes but i think calling them on this is a bit unfair. especially when there're are usually som many other valid things to

Just so people are clear on this when daveyboy_1ie changed from paying monthly to paying fortnightly they increasing the amount you pay annually by c. 8% (2/24 ~ 8%) and that's why the term is reduced, it's very little to do with the compounding effect of the interest. (if the monthly paymnet was increased by 8% the reduction would have been almost identical)

If anyone is undertaking a change based on this make sure you get the full facts available. ask the bank/building society/broker for a break down of the interest and capital before each payment along with dates for each payment I'm not too sure if they have to give you this or not but it's straight forward enough to pull together so they should have no problem doing it for you. Make sure you understand it too (i don't mean for that to sound snide but the number of people who enter into financial contract without fully understanding them is shockingly high)

Abelloid

murphm45 wrote: »

No. You'll only save a couple of hundred euro, all you save by doing this is the interest on the interest for those half months, depending on the term and size you mihgt make one or two less payments.

From a money saving point of view it's probably not worth it but obviously it's your decision (it might be easier depending on your scenario to pay this way for budgetting purposes)

Ah. Thanks.

So it's just basic economics really; pay more, reduce term. Hardly a revelation.

Dan_Solo

Some other websites are claiming the savings aren't anything like what is being claimed in this article.
Has anyone else done the sums?

smcgiff

Hi Folks,

This was in the Irish Times today. It requres two payments per month (saving is because interest is calculated daily) and you're effectively paying half early each month.

The important point here is that this works even if you don't pay extra per month. Of course if you pay extra then you reduce your mortgage even further. But the point to be made here is that it wont cost you any extra money each month.

It raises certain cashflow issues for sure though.

prospect

murphm45 wrote: »

the article in the Times (link below) says that yoiu can save 54k a year

Officer Giggles wrote: »

Where is the 53000 figure coming from then

snubbleste wrote: »

'journalist' makes error shocker

No,

As I understand it:

It says you could save that much (based on the example figures given) over the term of the loan (i.e. 30 years).

Also, the basis for that calculation is that the extra payments made in the 12 month period (26 instead of 24 if bi-weekly) are taken off the capital with out any interest, meaning the amount on which the interest is calculated also drops quicker, thus reducing the total amount of interest payable over the life of the loan.

Yakuza

I've just modelled it in Excel - the effect of halving your payment and doubling the frequency is negligible.

Changing from, say, 1000 a month to 500 every 2 weeks will, however, drive down the term / interest paid as you're paying more a year, not just tinkering with the frequency.

It looks as if Mr. Pope mixed up the two different ideas put forward in the article.

I can't wait to see him row back on this one.

murphm45

smcgiff wrote: »

Hi Folks,

This was in the Irish Times today. It requres two payments per month (saving is because interest is calculated daily) and you're effectively paying half early each month.

The important point here is that this works even if you don't pay extra per month. Of course if you pay extra then you reduce your mortgage even further. But the point to be made here is that it wont cost you any extra money each month.

It raises certain cashflow issues for sure though.

Not to be smart but it doesn't. In the example in the times (300k over 30 years) the total saving is only about €600 if you switch from monthly to half monthly. the APR in the example is 5.11% this gives and equivalent monthly rate of 0.42% per month or 0.21% per half month. if you do the calcs you'll see that over 360 months the loan is fully repayed and it takes about 718 half monthly ones to repay the loan with the monthly payment halved. so all you've done is reduced the term by a month. not the 2 and a half years the article suggests

Richard tea

I think ill hold off on sending that letter Im lost again.

murphm45

attached might help (i.e show there's no real benefit!).

murphm45

And another one. Sorry i couldn't put the two in one post

If they don't help sorry (and i'm sorry-ier if it makes thins worse), but the concept of compound interest isn't the easiest thing to explain in a forum (in person i'd proably still make a bags of it too but i've no chance here!)

im a believer

heard something similar on ray darcy this morning, sounds good but i have a feeling ptsb wont make it east for us. they charge direct debit fees and standing order fees. i will certainly look into it though any thing that means paying less interest sounds good to me! i had a thought the other day: what if the government set up a mortgage company, something like credit union type thing, charged a reasonable rate of interest and could offer fixed rates? im managing the repayments at the moment but cant fix it and can see problems in the near future and dont know what to do.
sorry bout the rant!!!

Officer Giggles

Yakuza wrote: »

I've just modelled it in Excel - the effect of halving your payment and doubling the frequency is negligible.

Changing from, say, 1000 a month to 500 every 2 weeks will, however, drive down the term / interest paid as you're paying more a year, not just tinkering with the frequency.

It looks as if Mr. Pope mixed up the two different ideas put forward in the article.

I can't wait to see him row back on this one.

Surely if your interest is calculated daily and you pay it in two goes there would be a saving

Abelloid

Richard tea wrote: »

Bi-weekly, twice monthly I was onto my bank and I can change my repayments by simply sending them in a letter of request. Not sure how to word it though:o The guy from the bank mentioned that its not widely advertised but I can do it. Do I request a change to Bi-weekly, twice monthly and do I have to state that I want it payed off the principal ammount

You do understand the difference, don't you?

Twice monthly only splits the mortgage into two equal payments without any substantial benefit, as pointed out above. Bi-weekly means for two months in every year you will make three payments and this is where how term decreases and savings are made.

If you are paid monthly it probably isn't a good idea, but paid weekly/fortnightly it might be easier.

Richard tea

murphm45 wrote: »

And another one. Sorry i couldn't put the two in one post

If they don't help sorry (and i'm sorry-ier if it makes thins worse), but the concept of compound interest isn't the easiest thing to explain in a forum (in person i'd proably still make a bags of it too but i've no chance here!)

I cant open .xls files:o

Old_-_School

Dan_Solo wrote: »

Some other websites are claiming the savings aren't anything like what is being claimed in this article.
Has anyone else done the sums?

For paying off half the monthly mortgage, half a month early, I calculated a total savings of €603.92 over the 30 years.
And that was using his assumption of 5% for the interest rate which is well off the mark.

Richard tea

JustinOval wrote: »

You do understand the difference, don't you?

Twice monthly only splits the mortgage into two equal payments without any substantial benefit, as pointed out above. Bi-weekly means for two months in every year you will make three payments and this is where how term decreases and savings are made.

If you are paid monthly it probably isn't a good idea, but paid weekly/fortnightly it might be easier.

I thought I understood. Im paid weekly. So for me to see a benefit I would need to switch to a bi-weekly payment. I have 31 years left on my mortgage so the savings could be substantial.

Or, would I be better off just paying a little bit extra off every month. I have an option for this also? plus this would be more flexible, Or could I do both...ie switch to bi-weekly payments and pay extra off the mortgage?

prospect

Its all a bit sensationalist I think, but certainly no harm to do bi-weekly payments if your cashflow can take it.

An alternative would be to place the equivalent of a months mortgage into a reasonable interest earning long term savings account, say 5 years, and then when it matures put it off against the mortgage and start again with a new savings account.

If the rate of interest on savings is higher than your mortgage interest rate (probably only applicable to trackers, and they will change upwards), then you'd probably be better off than following Mr Popes advice.

-ETA-
Badly worded:
The above is based on the equivalent of 12th of a months mortgage into a savings account each month for 5 years,
E.g. if your monthly mortgage is €1600, the putting approx €135 per month for 5 years at 2% would yield just about €8560.

Abelloid

The way I see it is if for example your monthly payment is currently €1000 per month, splitting this into two €500s and paying every second week now means you are paying back €1000 (or one full month) more per year.

If you are paid fortnightly this might be easier for you to manage, with the bonus of reducing the term.

Yakuza

Officer Giggles wrote: »

Surely if your interest is calculated daily and you pay it in two goes there would be a saving

Here's my spreadsheet. I've modelled it using pure compound interest functions that I learned as a baby actuary (rather than the Excel PMT function that Conor Pope uses; this is the figure in red - it has no bearing on the rest of the spreadsheet).

The one on the left is for paying once a month, the one on the right paying twice a month (but half the amount).
For the example cited in the article (300k over 30 years at 5%), the savings amount to approximately €2000 over the 30 years, or you pay off the loan approx 2 months early. There's nothing like the savings he atttests to. To get that, you need to pay half your monthly repayment *every two weeks*. That's where the savings rack up.

murphm45

Richard tea wrote: »

I cant open .xls files:o

I'll attach pdf if you want but they mightn't be much use (you won't see where the figures are coming from)

If you're paid weekly then i might be easier to pay your mortage weekly(from a budgeting point more than anything else, surely the bank told you this and i can't see them having any objection to you doing this, once they get their money they usually don't care how). If you currently pay 1,600 a month then you could pay 370 (16,000*12/52) a week (it'll be about the same annually, i've rounded the numbers so that might kick it out). this would have a minimal effect on the amount you repay over all but there would be a reduction (maybe two or three months worth of payments). any savings that are made are on the interest portions interest.

This might help (and sorry if it doesn't or comes across with any sort of an air of paronisation, i'm trying to help but i'm obviously just crap at it). Suppose you borrowed 10k from the bank for two years @ 10% per annum. At the end of the first year (assuming you paid nothing back) you'd owe 11k and at the end of the second year you'd owe 12.1k (11k + 10% interest). If you repaid it all then you would pay 10k in capital and 2.1k in interest. But suppose you pay the interest after the first year. the balance due at the end will now be 11k and if this is repaid 10k in capital will have been repaid with only 2k interest. the saving is 100 and is the interest on the 1k charged in year one. (obviously the mortgage numbers will be smaller but this hopefully gives an idea of how the savings are "generated")

If you increase the frequency of payment in your mortage all that is being reduced is this interest on interest (100 in the above example) but as the figures involved in the mortgage are smaller (due to a lower rate and shorter time frame between payments) the savings aren't as noteworthy, despite the larger sum and longer term.

If you're still struggling to understand arrange a meeting with the bank manager and ask them to run through the numbers with them (it's easier to explain this in person and they should be trained for help you with queries like this) and don't leave until you fully understand what's happening/how it'll work.

Again sorry if i've made things worse.

iMax

Yakuza wrote: »

Here's my spreadsheet. I've modelled it using pure compound interest functions that I learned as a baby actuary (rather than the Excel PMT function that Conor Pope uses; this is the figure in red - it has no bearing on the rest of the spreadsheet).

The one on the left is for paying once a month, the one on the right paying twice a month (but half the amount).
For the example cited in the article (300k over 30 years at 5%), the savings amount to approximately €2000 over the 30 years, or you pay off the loan approx 2 months early. There's nothing like the savings he attests to. To get that, you need to pay half your monthly repayment *every two weeks*. That's where the savings rack up.

Is this not what he meant ? It's what my original post was about. It should be manageable, the amount you pay off is (roughly) the same every "month" & once you get into a cycle of payments it should be very hard to make mistakes.

murphm45

prospect wrote: »

An alternative would be to place the equivalent of a months mortgage into a reasonable interest earning long term savings account, say 5 years, and then when it matures put it off against the mortgage and start again with a new savings account.

If you are contemplating this don't forget about DIRT. It'll reduce the interest you receive by 27% (or 30% if it's a term deposit > 1 year) so the rate will need to be substantially above that on the mortgage.

Yakuza

iMax wrote: »

Is this not what he meant ? It's what my original post was about. It should be manageable, the amount you pay off is (roughly) the same every "month" & once you get into a cycle of payments it should be very hard to make mistakes.

This is a verbatim quote from the article:

Conor Pope wrote:

If someone has a €300,000 mortgage taken out over a 30-year term and they make a monthly repayment, it will cost €1,610.46 every month, based on an average interest rate today.
If they pay twice a month, it will cost them €805.23 each time. So they are paying exactly the same amount every month.
But when a person pays monthly, the total interest on that loan over the full 30 years is €279,767.35 or €777.13 a month. If, however, that person pays off the mortgage twice a month then the total interest falls to €226,466.56 or an interest payment every bi-weekly period of €289.60.
The reason the interest falls so substantially is very simple.
Most banks calculate mortgage interest on a daily basis. If you owe €100,000 and pay off €1,000 monthly, a bank will calculate the interest owed on the full amount of €100,000 at the end of that first month. But if you pay off €500 every fortnight, then for the second half of that first month, the amount of interest you pay is less because for two of the four weeks, the capital owed is €99,500.
Spread that over the 30 years and the savings really mount up.

What he said and what he meant are different things, it would seem.

The problem is he talks about merely paying half the amount twice a month, then later on he talks about paying X every two weeks. They are two different things. I've bolded his main point in the second paragraph - he is giving the impression that a mortgage holder's outgoings won't change overall. If they take that approach, they will make modest savings, but they need to pay more per year to realise the radical savings. There's no way to magic up such savings without paying more.

He is mixing up two messages.

murphm45

iMax wrote: »

Is this not what he meant ? It's what my original post was about. It should be manageable, the amount you pay off is (roughly) the same every "month" & once you get into a cycle of payments it should be very hard to make mistakes.

The point is though you're no paying the same amount every month in some you'll pay 50% more (2 every year) then you would have before. So you have increased your mortgage repayments by over 8% per annum (26 from 24). If you increased your monthly payment by this 8.3% you'd see a nearly identical reduction in term and interest.

prospect

murphm45 wrote: »

If you are contemplating this don't forget about DIRT. It'll reduce the interest you receive by 27% (or 30% if it's a term deposit > 1 year) so the rate will need to be substantially above that on the mortgage.

You are, of course, correct.

You know it was in my mind as I was typing the post to mention DIRT, and when I came back to edit it was also to include DIRT, but I got distracted.

Thanks.

Yakuza

Dan_Solo wrote: »

Some other websites are claiming the savings aren't anything like what is being claimed in this article.
Has anyone else done the sums?

See my post here.

Richard tea

murphm45 wrote: »

I'll attach pdf if you want but they mightn't be much use (you won't see where the figures are coming from)

If you're paid weekly then i might be easier to pay your mortage weekly(from a budgeting point more than anything else, surely the bank told you this and i can't see them having any objection to you doing this, once they get their money they usually don't care how). If you currently pay 1,600 a month then you could pay 370 (16,000*12/52) a week (it'll be about the same annually, i've rounded the numbers so that might kick it out). this would have a minimal effect on the amount you repay over all but there would be a reduction (maybe two or three months worth of payments). any savings that are made are on the interest portions interest.

This might help (and sorry if it doesn't or comes across with any sort of an air of paronisation, i'm trying to help but i'm obviously just crap at it). Suppose you borrowed 10k from the bank for two years @ 10% per annum. At the end of the first year (assuming you paid nothing back) you'd owe 11k and at the end of the second year you'd owe 12.1k (11k + 10% interest). If you repaid it all then you would pay 10k in capital and 2.1k in interest. But suppose you pay the interest after the first year. the balance due at the end will now be 11k and if this is repaid 10k in capital will have been repaid with only 2k interest. the saving is 100 and is the interest on the 1k charged in year one. (obviously the mortgage numbers will be smaller but this hopefully gives an idea of how the savings are "generated")

If you increase the frequency of payment in your mortage all that is being reduced is this interest on interest (100 in the above example) but as the figures involved in the mortgage are smaller (due to a lower rate and shorter time frame between payments) the savings aren't as noteworthy, despite the larger sum and longer term.

If you're still struggling to understand arrange a meeting with the bank manager and ask them to run through the numbers with them (it's easier to explain this in person and they should be trained for help you with queries like this) and don't leave until you fully understand what's happening/how it'll work.

Again sorry if i've made things worse.

Thanks murphm45, no need to repost it in pdf. Im sure you are explaining it fine. I just havent the head for this financial talk. As for the bank explaining things. It never happened. I went through a broker who was just geared towards getting me to borrow as much as possible.

dudara

Threads merged together to avoid duplication

dudara

murphm45

Richard tea wrote: »

Thanks murphm45, no need to repost it in pdf. Im sure you are explaining it fine. I just havent the head for this financial talk. As for the bank explaining things. It never happened. I went through a broker who was just geared towards getting me to borrow as much as possible.

Thanks but i'm probably not (explain stuff was never my strong suit). with regard to getting advice you'll be in a much better position now. The industry is on it's hands and knees and people will (or at least they should) be only too happy to help. If you got it through a broker go directly to the bank and talk to them directly. if you need to arrange more meeting don't be afraid to. They might whinge abou it but that's what they're paid for! At the end of the day they just want there money back so if you're proposing something that could give them greater security in this regard they'll more than likely do their best to help

If that fails try talking to the regulator (rumour has it you can drop in and ask them questions). You might get more joy out of them.

One final bit of advise though, if you do anything make sure you know what it is you're doing and you fully understand any risks/consequences associated with it. I've seen people get there fingers burnt badly by diving head first into stuff they don'y fully understand