P + I repayments

All - have a quick question to ask the forumites regarding P + I repayments as part of a debt reduction strategy

If a loan is on P + I with full offset on a weekly repayment schedule as opposed to monthly does this mean having more frequent repayments the loan is paid off faster as it is amortizing quicker?

A few people have commented that it is the same irrespective of repayment frequency as there is full offset available. However there is the argument that fortnightly repayments are better as you have an extra repayment period, 26/2 = 13 as opposed to 12 months - not many have commented on having weekly repayments?

Would imagine that having weekly repayments the loan would be paid off sooner.

P.s. am aware of the IO + making P+I repayments into offset strategy however am keen on understanding the above

 

It will result in the same interest being incurred assuming that the amount you would have paid into the loan is paid into the offset account instead.

Overall the loan will be paid off quicker because it is being reduced. But if you assume the amount in the offset account is not spent and it is used to make the final payment to pay off the loan then it will work out the same.

 

Yep....but also one of the prime motivator of going offset vs paying P&I via a redraw is that the offset is essentially a transaction account..and banks can't just turn the tap off...redraws or line of credits are open to the whims of the bank.....

 

If the loan is fully offset (you have a $200k loan and $200k in the offset account), you're not going to pay any interest, but the loan will be paid off sooner.

P&I payments are calculated as a monthly payment dependant on the loan term, interest rate and amount. To get the fortnightly or weekly repayments, the bank simply divides the calculated monthly amount by 2 or 4 respectively.

As there are slightly more than 4 weeks in a monthly, you'll make an extra weeks payment about 3 months. As all of that payment is principal, the loan will be paid off sooner.

 

The repayments stay the same, but the principle / interest mix changes resulting in faster pay off.

Selling half, keeping half ATM and remaining ones are p & I. All part of a patient grand plan.

 

Noel Whittaker came up with the idea of fortnightly payments in the 1980s. At that time, paying off the mortgage and being debt free was considered the ultimate goal.

At that time you had a cute little repayment deposit book, and each month you went to the bank and paid the monthly amount. You could also make extra payments.

By dividing the monthly payment in half and paying each fortnight, you made an extra month's payment a year, all going off the principal. There are 26 fortnights in a year, but only 24 half months (12 x 2).

It was quite revolutionary and took a while for all banks and building societies to allow the changed repayments.
Marg

 

There are a few good excel spreadsheets floating around the internet (do a google search) that model the impacts of various repayment models (repayment frequency, amounts, offset accounts, interest rates etc etc etc). I played around with a few of the spreadsheets many years ago and found them very good for comparing many repayment models.

 

And if you're not a fan of spreadsheets, a lot of the banks having pretty graphs - they allow you to put in the interest rate, extra repayments, payment frequency etc, then show you (using different colours) how much is coming off your loan (P, and I).

But, given that so many PC people seem to like their numbers and spreadsheets (it looks way cooler when you can show other people that you actually understand all this investment stuff using a very technical spreadsheet), I'm sure the spreadsheets will be the better option

 

I remember when we had our first house, at the end of the year I totalled our repayments and compared to how much we had paid off the capital. Only a few hundred dollars. We saved hard and a few months later we deposited an equal amount into our loan, calculating we had just made the equivalent of a year's payments, as well as making our regular monthly payments. No spreadsheets in the 1970s.
Marg

 

In 1980 I took the monthly repayment and divided it by 4, then rounded that amount up to the next Ten. We paid that each week across the counter. I also dropped our tax return cheques into the mortgage. After the first year, we had effectively repaid two year's worth of repayments. We paid off our first home in 8 years instead of 15.

Whittaker and the staff at Suncorp stated that paying weekly didn't make much difference, but when we did the same thing with our second home in 1988/9, the effect would have been to pay off a 30 year mortgage in approx half the time. We steamrolled that by continuing to pay higher repayments after the 17% era once the rates were reduced and knocked a further seven years off.

With recent mortgage calculators on the bank's websites, I see that these days they dont just divide the monthly repayment by 2 or 4, they seem to take the actual number of days into consideration. This little change reduces the effectiveness of this strategy significantly, same for the current low interest rates. But it will still provide some benefit to the borrower.

 

That's because most banks now calculate interest daily. Paying fortnightly allows an extra "month" worth of repayments. Same as weekly. Paying weekly offers a marginal saving of interest over fortnightly repayments per month? I'm thinking every little saving helps with non deductible PPOR debt.

 

Exactly. The other consideration is that with most PPOR's having offset accounts, even that marginal interest saving will be nonexistent if the funds are otherwise sitting in offset.

 

Interest was always calculated daily. Every dollar that is deposited before the due date gives a compounding effect. Of course the banks are going to discourage their customers from repaying ahead of time as it reduces their profit.

I agree that every bit helps. I was more alluding to the idea that currently we wont get the massive reduction received in the days of higher interest rates.

 

thanks for the replies - would have been an interesting time with rampant inflation and double digit interest rates back then, think these days many investors starting out may think that as long as rates around 4/5% they can cop being negatively geared without factoring in interest rates at record low levels... certainly this is a repetitive theme when discussing property with my friends and peers