You’ve probably heard the hype about making your mortgage payments bi-weekly, or fortnightly, and how it can slash years off the length of your loan and save you thousands of dollars.

Some debt reduction companies will actually charge you massive fees to teach you how the bi-weekly debt reduction system works.

Or you can do a bit of research and learn about it for yourself and save yourself some fees once you realize how easy it is.

Why Pay Bi-Weekly Payments?

When the bank sets up your mortgage, they amortize your repayments. This means they have already factored into every one of your repayments the amount for your interest (their profit) plus a tiny amount that is subtracted from your principal balance. This means that for every payment you make, the amount that you owe is only reduced slightly.

Most people pay only the amount written on their statements each month… and banks love this way of thinking because it allows them to make the largest profit from their customers.

By making more frequent payments, you not only reduce your balance more quickly, but you also reduce the amount of interest the bank is able to charge you.

Getting Started with Bi-Weekly Payments

Before you change any of your payments, you need to calculate the amount you will be paying each fortnight (14 days). Start by dividing your monthly repayment amount by 2. It’s not rocket science. Just look at the amount of your required monthly payment and divide it by 2.

This new amount will become your new bi-weekly payment.

Don’t try to use any other calculations and don’t allow your bank’s customer service people to calculate it for you. Insist the bank’s customer service people use your figure — not theirs. This is important.

Setting Up Your Bi-Weekly Payments

You will need to call your bank or lender and work out your payment changes so that they can make any necessary updates in their computer systems

The bank staff might make suggestions about doing “real” bi-weekly payments, which are “even cheaper” than the figure you worked out from the step above. If this happens, use your own bi-weekly figure that you worked out above and don’t be swayed.

Why Bi-Weekly Payments Work

When you pay your loan monthly, you will make 12 payments each year. However, when you pay bi-weekly (every two weeks) you will make 26 payments per year — which actually works out to 13 monthly payments.

This means if you continue to pay your mortgage payments bi-weekly you will be one full monthly payment ahead each year.

It’s very simple, but this method actually can cut several years off the length of your loan and save you thousands of dollars in interest charges.

Try entering your own numbers into any good online mortgage calculator and check what savings you could be making by paying your mortgage bi-weekly!

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