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ANALYSIS: You might have seen a video doing the rounds on TikTok, telling you that you can “beat the banks” by paying $1 a day on your home loan to stop interest accruing on your account.
The theory goes that banks won’t charge interest on any day a payment is made. And if you make this regular payment, when you make your normal payment at the end of the month, it will all go on to principal, allowing you to smash down your home loan much faster.
There’s bad news and good news.
The good news is that some of the theory behind the idea works.
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The bad news is that it’s going to cost you a lot more than $1 a day to stop interest accruing on your home loan.
Massey University banking expert Claire Matthews said someone with a $600,000 mortgage and a floating interest rate of 7.5% would need to pay $123 a day to keep interest at bay, and allow their full repayment to go to the debt owing.
“That’s on the basis that interest is accruing at about that rate, with an adjustment to recognise that the loan balance would be slightly smaller each day as a result of each payment until the bank debited the monthly interest charge.
“But all you are actually doing is paying off the interest rate over the month. Yes, you would end up paying off your loan slightly quicker because you would accrue less interest, but that’s the same reason fortnightly payments are better than monthly payments, and even if you divided your fortnightly payment into 14 daily payments you would pay slight less interest.
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Higher interest rates mean you can save more money by making bigger loan repayments.
“Essentially the computer looks at the loan balance each day and says ‘what is the balance today after all transactions’, and accrues a daily charge on that basis.”
She said the suggestion that the bank would not allow interest to accrue on any day a payment was made was incorrect.
You would also have to be on a floating rate, which is higher than a fixed rate, to make a lot of regular payments.
A spokesperson for ANZ said it had not seen any customers attempting to follow the “hack”.
But she said people who wanted to make extra repayments could do so, even if they were on a fixed-term rate.
“If it’s the first increase that year, you can increase your regular repayments towards your home loan by up to $250 a week without incurring [a fee]. Plus, each year you can make an extra lump sum repayment that’s no more than 5% of your current loan amount without incurring [a fee].”
She said if someone wanted to break a fixed term to change the structure of their loan, and was moving to a higher interest rate, there might not be a break fee charged.
People with a floating rate could repay any amount they wanted at any time without being charged a fee but there might be a minimum level of repayment required.
“We recognise not everyone is in the position to do this, but people who can put a little bit extra on their home loan payments will pay less in interest and save money over the long term.”
Paying extra can make a big difference to the cost of your loan over the long term because it goes straight to the amount owing, meaning there is less debt to attract interest in future.
If you have a $600,000 loan with an interest rate of 6%, you’ll pay $1783 a fortnight if you have 25 years remaining. If you can increase that payment to $2000, you’ll clear the debt five years early and save more than $130,000 in interest payments.
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