Daniel Newell: Do you really know how your mortgage is calculated?

The benefits of the Reserve Bank’s 25 basis-point cut to official interest rates should soon start flowing through as lower repayments for mortgage holders.

And while many stretched households will no doubt take advantage of the cut and divert the savings towards easing the burden of other everyday expenses, for most it could be an opportunity to rebuild that all-important redraw buffer.

The tightest monetary squeeze in a generation left plenty of homeowners struggling to find savings elsewhere to meet rapidly rising monthly repayments. But despite the pain, the big banks have consistently reported all but a fraction of their customers kept their heads above water, with the number of those in arrears only marginally above long-term averages.

For someone with a $500,000, 30-year loan on a variable rate of about 7 per cent, the RBA cut last month will take monthly repayments down from $3337 to $3286 — a saving of $48.

So that’s a couple of extra coffees a week, or maybe you can now afford to add back a few more of those brand-name basics into your trolley.

But, if you have managed to adopt to the “new normal”, that $48 could be better left in the mortgage to restore your deflated redraw buffer but also pay off your loan years earlier.

You’d be stunned by the number of first-time homebuyers I’ve spoken to over the years who either don’t understand how interest on their mortgage is calculated or know what an offset or redraw facility is.

Firstly, for those who don’t know, the interest on your mortgage is typically calculated daily.

Try it with your own loan — you may be shocked to see what you pay each day.

Let’s say you owe $300,000 and you have an annual interest rate of 6 per cent.

The daily interest payment will be $300,000 times 6 per cent (0.06) then divided by 365 (the number of days in a year because it’s an annual rate). That’s $49.32 a day. Those are then added up for each day of that month and that’s your interest charges.

Scary, no?

That daily calculation is why making repayments weekly or fortnightly instead of monthly can save you thousands off your loan each year — and tens of thousands over the life of the loan.

Pay weekly and that’s 52 payments a year. Pay fortnightly and you’re making 26 payments a year instead of 12, so that’s essentially an extra month worth of payments each year. Get it?

Now add the benefit of keeping that extra $48 in there and the math is even better.

By Canstar’s calculations, if the RBA makes four 25 basis-point cuts this year and the banks pass them on in full, a homeowner with a $600,000 debt with 25 years remaining could save four years and $89,143 in interest if they keep their repayments the same.

Of course, not everyone will be able to after a brutal few years. But it proves a little can go a very long way.