There was a a misleading article in the Irish Times today (apr 4th 2011) (later corrected online) – where they stated that paying half of a mortgage payment twice a month could save someone with a €300,000 mortgage as much as €54,000.
The truth is – that paying half of your normal mortgage payment twice a month will NOT save you a significant amount of money. Even if your lender allows it – and some don’t – it will only have a small effect and then only if they calculate interest on a daily basis rather than monthly.
At best – it will save you about 2 months worth of repayments over the lifetime of the mortgage (30 years). For the example given in the Irish Times article (300k over 30 years at 5%), the interest savings would amount to approximately €2000 over the 30 years. NOT €54,000 Euro
Paying half the mortgage amount every two weeks – is a different matter. By doing this you are overpaying your mortgage every year by the equivalent of a months repayment . Of course – whenever you overpay any mortgage – your balance comes down quicker and you pay less interest over the life of the loan. The €54000 reduction in interest repayments is because you will have overpaid by €30000 .
If you can afford to overpay by €1000 a year – then OK – do it. It might be better though to save that money in a separate account and pay it off in a lump sum instead of making a formal arrangement to make payments every 2 weeks.