Help me understand this mortgage 'hack'

[BoBirmingham]

I recently saw a video where an American man was advocating paying your mortgage twice a month instead of once because of how the interest is calculated and charged.

So instead of paying $1,000 on 1st of the month you would pay $500 on the 1st and $500 on the 14th of the month. Apparently this would save you money in how much interest you pay.

I'm not very financially literate, but this does not sound right to me.

Can anybody confirm if he's on to something there, or explain to me in a bit more detail what's going on?

Thanks

In effect you are paying £500 per month early so saying two weeks interest. But it only works if you start off like that or start paying the £500 AFTER you have made the normal due payment of £1,000.

So for example, my mortgage was due on 28th of the month. I'd have to make my normal monthly payment (it was £500) then two weeks later I'd pay another £250 so that payment was two weeks early and carry on like that.

Interest is calculated daily. However it also only works if you have a mortgage where there are no penalties for overpayment or early payment.

I think lots of people in the US are paid 2-weekly so would normally pay the whole mortgage after the 2nd payment of the month. So he’s suggesting paying half with each pay cheque.

I don't think a uk mortgage company would agree to this...

It wouldn’t work for most mortgages. You can overpay fine, but you can’t underpay them next month without agreement. Say your mortgage is £1000 and collected on the 1st:
On the 1st you pay £1000 as normal
On the 15th you overpay £500, fine
The next month on the 1st £1000 would be due as normal unless you’d agreed a mortgage holiday.
It wouldn’t work ongoing.

I'm not sure how much difference it would make, but small amounts do add up for mortgages. When we had a mortgage the rates were very variable. If the interest rates went up we obviously increased our payments because we had to, but when the rates went down we left our payments at the higher rate. Generally it was only an extra £30 - £100 (in the 90s) but because it was so regular we paid off our mortgage years early.

It's been a while since I've worked directly with mortgages; a couple of years at least, but back then no UK mortgage provider would have allowed this.

It works in the US market, both financially and practically, because they tend to be on two-week payment frequencies.

Here you'd need to pay the due amount before it was due, and be mindful of overpayment penalties.

I think the idea is paying fortnightly which means each year you will pay one extra month. 26 fortnight’s per year compared to 12 months

It would work if you paid early and it would work in the UK, many mortgages allow unlimited overpayments.

Eg if your payment was due on the first and you paid £1000 then.
You then paid another £500 on the 15th, then paid £500 on the 1st and again £500 on the 15th, you're always £500 ahead so pay interest on £500 less. You benefit even more if you pay every 2 weeks because you make the equivalent of 13 monthly payments in a year instead of 12.

But seeing as being paid fortnightly is rare in the UK, it won't benefit many people. But if you want to overpay, you can usually just manually transfer money when you want to, so can get the same benefit, just by sending bits of money as and when.

Makes sense if paid in advance.

We paid ours off early by rounding the payment up, so say it was 876.00 a month, we just paid a straight 1000.00

When we got pay rises we kept half for us but paid the other off the mortgage, even if it was only £20. We were still “better off” by £20.

That's America. This is the UK. Things work differently. It depends on your mortage contract

We had a Yorkshire Bank mortgage that was set up like this. It made a sizeable difference over time.
We paid half the amount fortnightly, so taking advantage of the daily interest rate calculations and also making the equivalent of 13 payments a year rather than twelve.
Also, every time the interest rate went up we upped the payment, but when the interest rate went down we left the payment the same.
Paid the mortgage off in 12.5 years - would take a deal like this again in a heartbeat.

As others have said, in the UK you cannot underpay (not without consequences).
What almost every mortgage lets you do is overpay, up to a certain amount, without penalties. The more you overpay, the faster you repay the loan, and the less you will have paid in total interest.

However, do not overpay so much that you are left without enough of a rainy day fund for emergencies etc.

Also, some people prefer not to overpay the mortgage but to invest elsewhere - the reason being that, if your mortgage charges 1% interest but you can invest that money at > 1% elsewhere, you are better off doing so. Obviously this involves an element of risk, and requires a modicum of financial literacy, so it's not for everyone.