Mortgages

We recently switched banks and got what we thought was a good deal on fixed interest rates. We opted for fortnightly repayments as this would help us pay off the mortgage quicker. At the same time as our first repayment we were charged interest. OK no problem and expected to be charged interest in another months time. However we were charged interest again with the next fortnightly payment.

So my questions are;

Is this normal?
Does anyone else get charged interest fortnightly instead of monthly?
Do we end up paying more interest this way? I'm sure we do but can't work it out.

We have emailed our mortgage manager to see if this is a "feature" of our mortgage or if they have just made a mistake.

If you are making regular payments then the interest will be calculated for each payment regardless of the interval. Paying fortnightly instead of monthly will actually reduce the total amount of interest yo will pay over the lifetime of the mortgage

Disclaimer: I am not a mortgage advisor.

I'd say it is standard to break up the interest you pay (commonly advertised to you as a yearly percentage - eg 5.5% pa), into the same chunks as you are paying.

So if you were repaying monthly, then the interest you pay will be 5.5%/12 = 0.4583% (of your remaining principal) per month
If you were repaying fortnightly, then the interest you pay SHOULD be 5.5%/26 = 0.2115% (of your remaining principal) per fortnight (there are 52.14 weeks, 26.07 fortnights in a year)

However, some banks simply use half of the monthly interest, which would be 5.5%/24, which is a slightly higher value of 0.2292%, then you pay it fortnightly. For 26 fortnights a year. This would make it almost 6% pa. So make sure your bank doesn't pull this.

Yes, if you pay fortnightly, your interest will also be fortnightly, as it's calculated at the time of each payment. However, by paying fortnightly you do save money on your mortgage interest

That's because you will make 26 half payments a year, which totals 13 full payments instead of 12. As you're paying off the loan faster, you will pay less interest.

However, you could achieve the same result by boosting your monthly payments by one-twelfth.

You can check how much you are saving by using one of the many mortgage calculators online and changing between the monthly and fortnightly settings - there are some at Kiwibank that do this that are free to use.

http://www.kiwibank.co.nz/personal-banking/home-loans/home-loan-calculator.asp

We pay ours fortnightly but only get charged interest monthly on the 'anniversary' of the date we took out the mortgage. It doesn't automatically come out at the same time as the mortgage payments, so I guess its horses for courses and depends a lot on your bank.
Cheers, Mich.