Common Mistakes With Refinancing Payment Frequency

Refinancing is the right moment to choose your repayment frequency on purpose. The mistake to avoid is a fortnightly amount worked out the wrong way, because it can either cost you more than you planned or save you less than you expected.

If you are weighing up a refinance with a Helensvale household budget in mind, this is how the options work and where borrowers slip up.

Which Repayment Frequency Suits a Refinanced Home Loan?

The right frequency is usually the one that matches your pay cycle and that your lender allows. Most lenders offer weekly, fortnightly and monthly repayments, but the options can differ by lender and by loan product.

If you are paid fortnightly, a fortnightly repayment means the money leaves your account just after it arrives, which lowers the chance of a missed payment. Interest on many home loans is calculated daily, so paying more often can trim interest slightly. How much depends on your lender's method, so ask how interest is calculated and charged before you choose.

Common Mistake: Dividing the Monthly Repayment by 26

A fortnightly repayment set at half the monthly amount makes 26 half payments a year, which equals 13 monthly payments. A fortnightly repayment set at the monthly amount multiplied by 12 and divided by 26 is just the same yearly total, paid in smaller pieces.

As an illustrative example, consider a Helensvale couple who refinance a $600,000 home loan on a 30 year term. They use an example rate of 6.75% p.a., which is not a current market rate. Their principal and interest repayment is roughly $3,892 a month, or about $46,700 a year.

They are paid fortnightly, so they compare two fortnightly options:

• Monthly amount x 12, divided by 26: about $1,796 a fortnight, which is the same yearly total as monthly.
• Half the monthly amount: about $1,946 a fortnight, which adds up to about $50,592 a year.

The couple choose the half-monthly option because their budget has room. They pay roughly $3,892 more over the year than they would monthly. That extra goes towards the loan balance. The trade-off is a tighter fortnightly budget. Before settling, they confirm the lender lets them move back to a lower repayment if their circumstances change.

Does Refinancing Change Your Repayment Amount?

Yes. A refinance can lower your repayment through a lower interest rate, a longer loan term, or both, and only the first of those reduces what the loan costs you overall. ASIC's guidance says that if repayments fall only because the term is longer, you should be told you will pay more interest or other charges over that longer term.

If you want the repayment to drop but the loan to keep its pace, you can ask for the new loan on a shorter remaining term or keep paying your old amount. Your broker can show you both versions side by side.

Costs also matter. Depending on your loan, a refinance can involve a break fee on a fixed loan, a discharge fee on the old loan and an application fee on the new one. These need to be weighed against the savings, whatever frequency you choose.

Offset and Redraw: Other Ways to Cut Interest

An offset account and a redraw facility can both reduce the interest you pay, and they work differently from a payment frequency change. Money in an offset account sits beside your loan and reduces the balance that interest is charged on, while still being accessible. Redraw lets you withdraw extra repayments you have already made.

Before you refinance to a loan with an offset account, check the trade-off. Some loans with offset accounts carry a higher rate or an annual fee, depending on the lender, so the saving needs to outweigh that cost. With redraw, check whether your lender limits withdrawals or charges for them, and remember that redrawn money is borrowed again.

If you are paying extra on a fortnightly basis, your lender can tell you whether those extra amounts go into redraw or are locked in.

Coming Off a Fixed Rate: Check Frequency Rules First

When a fixed term ends, you can usually move to a variable loan or fix again, and the frequency options may change with the product. A break fee applies only if you end a fixed loan before the term finishes, so timing a refinance for the fixed rate expiry date can avoid it.

Some lenders limit extra repayments on fixed loans, which can make a half-monthly fortnightly repayment less useful there. If you switch to a variable loan, extra repayments are generally less restricted, but confirm this in the loan terms.

What to Ask Before Lodging Your Refinance Application

Ask three things: how the lender calculates interest, whether you can change frequency later without a fee, and where extra repayments go. These answers decide whether your chosen frequency does what you expect.

A loan health check is a quick way to see your current repayment, interest rate and loan features next to the options available. Part of the refinance process is also a review of your current loan balance and your repayment history, which lenders consider when they assess an application. If you are close to the Helensvale train station and light rail connection and commute daily, a fortnightly rhythm that matches your pay can take one thing off your plate, but only if the repayment amount is set correctly.

For local help, our team can guide you through the Helensvale mortgage broker service and a repayment comparison using your own numbers. Use a lender or Moneysmart calculator to test the figures too.

Call one of our team or book an appointment at a time that works for you, and we will compare your current repayment frequency with the options on a refinanced loan, spell out the costs and trade-offs, and help you move forward with confidence.

Frequently Asked Questions