RateCity (www.ratecity.com.au) has warned mortgage borrowers not to assume that fortnightly repayments will automatically save them money, following an investigation into the different methods used by lenders.
Damian Smith, RateCity's CEO, said that RateCity's research showed that out of the major four banks, the Commonwealth Bank's methods for calculating interest offered the best savings for fortnightly repayments.
"It's possible to get big savings by paying your mortgage fortnightly rather than monthly - but it really depends on the lender.
"It's actually a pretty simple but profound difference - unless your lender credits you with 26 payments per year (as opposed to 24), then fortnightly payments don't really matter. It's the difference between genuine fortnightly payments (every 2 weeks) and twice-per-month payments," said Mr Smith.
RateCity compared the mortgage repayment calculations of the major four banks - ANZ, Commonwealth Bank, National Australia Bank (NAB) and Westpac - and found that the difference in savings caused by repayment frequency varied dramatically.
All four banks offer the option to make monthly, fortnightly or weekly mortgage repayments but each has different methods of crediting payments. The difference in savings was dependent on when each lender calculated interest and how they charge the repayments.
ANZ, NAB and Commonwealth Bank calculate fortnightly payments by dividing a monthly payment by two. However, ANZ and NAB only debit 24 fortnightly payments per year, or two payments per month. By contrast, Commonwealth Bank credits payments every two weeks, meaning a borrower makes 26 payments in a calendar year. As a result, Commonwealth Bank customers get credit for two additional fortnightly payments every year.
Westpac customers are charged 26 payments per year however the repayments total the same amount as monthly repayments. This means borrowers aren't paying any extra each year compared to monthly repayments but they save on interest by paying part of the principal off sooner each month.
Standard fortnightly repayment options of the major four banks:
* ANZ: monthly payments are divided in half and debited 24 times each year
* Commonwealth Bank: monthly payments are divided in half, debited 26 times each year
* NAB: monthly payments are divided in half and debited 24 times each year
* Westpac: annual payments are divided by 26 and debited 26 times each year.
Damian Smith, RateCity's CEO, said that while many lenders encourage borrowers to pay their mortgage off fortnightly, it won't always benefit the borrower.
"We compared how the major four banks credit repayments on home loan accounts and were really surprised at the differences between each one.
"Using a scenario of $300,000 with an interest rate of 7.30 percent over 25 years, Commonwealth Bank customers could save almost $77,000 in interest and reduce the length of their loan by four-and-a-half years by making fortnightly repayments as oppose to monthly.
"Using the same scenario, Westpac borrowers could save almost $7,000, but ANZ and NAB customers would save less than $400 over 25 years."
RateCity's new home loans calculator shows how much borrowers can save by making fortnightly repayments as well as increasing repayments however, as found in the above comparison, not all lenders allow borrowers to save with fortnightly repayments and some home loans charge fees for accelerating repayments.
Mr Smith said borrowers need to be careful when comparing home loans and to ask lenders for all the calculations and repayment details before making a decision.
"Lenders that only credit fortnightly payments as "twice per month" rather than 26 times per year are essentially accepting money earlier from borrowers without rewarding them for the early repayments and pocketing the interest.
"That's why it's important for borrowers to check how their lender charges interest and credits repayments, and switch to a better deal if it doesn't suit your needs," said Mr Smith.