Paying off your mortgage early (we got it wrong)

Yesterdays Irish Times carried a story in which our firm was mentioned regarding how to reduce your mortgage balance faster by paying every two weeks.

The idea of paying twice per month would give you 24 repayments whereas paying ‘every two weeks’ would result in 26 payments. It’s the same type of simple calculation error that makes people say there are 4 weeks in a month rather than 4.33 months (52/12)

If you are merely using a time period where payments add up to the same amount then the actual end results are somewhat the same, I used the formula below

M = P [ i(1 + i)n ] / [ (1 + i)n – 1]

M = Mortgage Repayment
P = Principal borrowed
i= interest rate (for monthly payments this works out at i/12)
n= payment periods (eg: 10yrs = 120 monthly payments)
And took an example of a €250,000 mortgage over 25 years with a 5% rate after which you get this

Showing that if you have a consistent payment over any time period the number of payments doesn’t matter if the gross amount remains the same.

Because of the nature of daily compounding (you’ll see that I started to tinker with that formula in the table above, it’s the FVn one) you do save minor amounts because there is a small repayment between periods but it is literally cents not Euro we are dealing with.

The big savings comes about if you effectively make a 13th month repayment by paying (€1,461/2) x 26 which would be €18,993 p.a. versus €17,532 if you stuck to the regular monthly payment (difference of €1,461 is the same as a regular monthly payment, hence we talk about the non-existent ‘13th month’).

In essence an overpayment of 1/12 of €1,461 achieves this (c. €121 p.m.), and if you were to do this then there are massive saving which is what the article was alluding to.

Total cost of credit above is c. €188k make the incremental payment for 10yrs and your cost of credit comes down to €168k a €20,000 difference which cost €14,520 (€121x120mths). Do this from the start and your 25 year mortgage is over in less than 22yrs.

I’m kicking myself because if I had run the numbers I would have spotted this, but I didn’t and that means that irrespective of this there is culpability from a commentary side of things, I don’t generally comment on figures unless I have looked ‘under the hood’, therefore I owe an apology to people who may have read this and thought that there as an easy solution to make their lives financially better and by their interpretation there was an inference that we did the calculations. My dad used to say ‘if it looks to good to be true….’, you know the rest.

Having said that, it was also an honest mistake by a consumer champion who took the figures in good faith from the source providing them. Mr. Pope has done countless good for people in Ireland and that needs to be taken in perspective, something which a lot of websites commenting on this have failed to do, today’s Times carried the correction which was the soonest publication day possible.

As recently as this week it was Conor Pope who caught the ESB out on not offering the best deals to people in arrears and due to his actions there is a huge amount of political pressure coming on the ESB from Government Ministers and the NCA.

For my part, mea culpa, we have a policy of apologizing early and often when we are wrong, and although the calculation was not ours, we should have double checked before making any comment. We think Conor Pope is doing a great job and look forward to working with him as we do all people forwarding the objectives of savvy consumers; even the good people get it wrong from time to time, for our part we were just idiots, but hope you’ll forgive us!

Comments

  1. Shane

    No big deal! Keep up the good work. I enjoy your “no BS” commentary.

  2. Kenneth

    Karl,
    Thanks for the apology, I always enjoy your commentary on the radio and twitter.
    I’m not sure if you give advice but here goes!
    I’m wondering if you could clarify this for me. I have a few euros earning 3.3% in a deposit a/c and if I lodge it to my mortgage a/c my principal will be reduced immediately. Will the bank then recalculate my repayments from the following month for the same term (25 years)?
    If I ran into cash flow problems in a few years time and missed a few months payments would I be straight into arrears even though I am technically ahead of where I contracted to be at the outset?
    I have a rainy day fund and wondering if I should use some of it to pay off my std variable motgage which is with PermTSB and is soon to be 5.5%.
    Thanks,

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