Why am I paying so much on my loan yet it's barely reducing?

Hello Nicole,

I have come across your article titled "Nicole Helps ... identify a good offset account". My questions to you is: I make loan repayments fortnightly and we have an offset account (this is something I will have to investigate further after reading your article). My real concern is why doesn't my mortgage debt level reduce every time I make a repayment? Do I need to specifically request that my repayments should be paid as a principal payment to reduce my mortgage? I understand we pay interest and this is why sometimes we may not see the actual principal reduce but I am making fortnightly repayments and also have an offset account linked to my mortgage. Can I request a schedule of payment which shows projections of my debt levels reducing with each repayment I make?

Warm regards, Alex

I am sure you're not alone in wondering this Alex. And there are a few different parts to the answer.

Firstly, are you sure you have a principal and interest (P&I) mortgage, and not an interest-only one? It's worth double checking - an interest-only mortgage means your debt never reduces and, ultimately, you'll need a separate plan to clear it.

Let's assume it is P&I though. You don't say for how long you've held your mortgage but if it's relatively new then most of your hard-earned money is going towards keeping the lender functioning and looking pretty. At the beginning of a loan some 70 per cent of your repayments is interest and only the remainder, I'm-finally-getting-ahead money.

Over the 25 or 30 years of your loan, that slowly reduces such that in the final year, virtually every cent is wiping off your debt.

If your lender's online banking is sophisticated enough, this albeit slow progress should be visible at all times.

And the same goes if you're making repayments fortnightly to trick yourself into paying that bit extra every time, as I recommend. That is, of course, if you are canny enough to simply pay half your monthly repayment, fortnightly, rather than let your lender calculate a fortnightly amount that will see you pay precisely the same amount of interest - over the same period.

But with regards to your offset account, this is an entirely separate account where money held in it is netted off your mortgage balance only on interest calculation and you pay interest on that reduced amount.

Sure, that should also see you make small overpayments each month but if you're expecting it to look dramatic, it won't.

Yes ask for a projection. The lender works for you.

Nicole Pedersen-McKinnon is a money educator and consumer advocate: themoneymentorway.com. You can write to her for help solving your money problem, or with a consumer question, at nicolehelps@fairfaxmedia.com.au.

This story Why am I paying so much on my loan yet it's barely reducing? first appeared on The Sydney Morning Herald.