1

You would need to borrow $660,000 and your fortnightly payments would be: Reducing loan $2,299.61 given 5.75 variable interest rate

How much of the $2300 fortnightly paid is interest, and how much is money coming off the principal?

  • That's all you're given? Any other assumptions? Are you just looking for the split of the first payment? – mbhunter Sep 7 '13 at 6:34
  • yeh, is it just %5.75 of the $2300 is interest, and the rest comes off the principle? – Baconbeastnz Sep 7 '13 at 8:13
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Unless you are getting the loan from a loan shark, it is the most common case that each payment is applied to the interest accrued to date and the rest is applied towards reducing the principal. So, assuming that fortnightly means 26 equally-spaced payments during the year, the interest accrued at the end of the first fortnight is

$660,000 x (0.0575/26) = $1459.62

and so the principal is reduced by $2299.61 - $1459.62 = $839.99

For the next payment, the principal still owing at the beginning of that fortnight will be $660,000-$839.99 = $659,160.01 and the interest accrued will be

$659,160.01 x (0.0575/26) = $1457.76

and so slightly more of the principal will be reduced than the $839.99 of the previous payment. Lather, rinse, repeat until the loan is paid off which should occur at the end of 17.5 years (or after 455 biweekly payments). If the loan rate changes during this time (since you say that this is a variable-rate loan), the numbers quoted above will change too.

And no, it is not the case that

just %5.75 of the $2300 is interest, and the rest comes off the principle (sic)?

Interest is computed on the principal amount still owed ($660,000 for starters and then decreasing fortnightly). not the loan payment amount.


Edit After playing around with a spreadsheet a bit, I found that if

  • payments are made every two weeks (14 days apart) rather than 26 equally spaced payments in one year as I used above,

  • interest accrues at the rate of 5.75 x (14/365)% for the 14 days rather than at the rate of (5.75/26)% for the time between payments as I used above

  • each 14 days, $2299.56 is paid as the biweekly mortgage payment instead of the $2299.61 stated by the OP,

then 455 payments (slightly less than 17.5 calendar years when leap years are taken into account) will pay off the loan. In fact, that 455-th payment should be reduced by 65 cents. In view of rounding of fractional cents and the like, I doubt that it would be possible to have the last equal payment reduce the balance to exactly 0.

  • ahok now i see, thank you Dillip for the info! Wow the banks are greedy!!! – Baconbeastnz Sep 7 '13 at 13:09
  • Doesn't fortnightly usually indicate a two week interval, i.e. 26 payments each year? – John Bensin Sep 7 '13 at 13:15
  • @JohnBensin You are right; I was thinking of semi-monthly, and falling into the same trap that the "we will take care of your mortgage payment" companies set when they offer to make semi-monthly payments instead of biweekly payments. I will edit my answer. – Dilip Sarwate Sep 7 '13 at 13:47
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    @Baconbeastnz It is not the case that banks are greedy but that you are not understanding the terms of the loan agreement that you signed. If you really have borrowed $660,000 (which sounds like a jumbo mortgage loan) without understanding the terms of the loan, I strongly recommend reading a book about managing your money, such as Consumer Reports Money Book to educate yourself about such interesting matters. – Dilip Sarwate Sep 7 '13 at 14:00
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    @DilipSarwate - Your numbers match what I calculate. Did you also calculate the full term? I get 17.5 years. You agree? – JoeTaxpayer Sep 7 '13 at 15:42

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