Paying down more faster does come with risks
Paying down more faster does come with risks
Posted on Wednesday, October 31 2012 at 10:03 AM
The risk of over committing and mortgage defaulting could be a real scenario if mortgage holders don’t fully understand the type of additional home loan repayments they take on, cautions national mortgage broker LoanMarket.
While the intention to pay down
the mortgage faster is smart at times of lowering interest rates, property
owners could face a number of traps, LoanMarket’s Alexander Heifetz says.
“It is quite common to hear from lenders or in the media that in order
to pay off a home loan quickly you need to pay fortnightly or even weekly,” Heifetz
says.
“In certain cases this can be wrong and could create unnecessary
over-commitment and stress, or could even lead to missed repayments and loss of
property.”
Two types of fortnightly repayments are generally offered – ‘true’ fortnightly repayments and ‘inflated’ fortnightly repayments, he
says.
“Some lenders have true fortnightly repayments where the repayment is
calculated as a simple division of the annual repayment by the number of
fortnights in the year, while inflated fortnightly repayments is a simple
division of the monthly repayment by two,” Heifetz says.
“There can be a significant difference in the amount you have to repay
and if the bank charges inflated fortnightly repayment then you pay extra and
this way you pay your loan down faster. The borrower just has to be sure they
can afford to pay the extra amount.”
It’s particularly important to
understand the home loan repayment structure in times of job insecurity and
economic volatility, he says.
“If you lose your income for whatever reason and start missing mortgage
payments, this is when the difference between repayment frequency becomes
important,” Heifetz says.
LoanMarket’s repayment examples:
True
fortnightly repayment calculation: $2000 x 12/26 = $923
Inflated
fortnightly repayment calculation: $2000/2 =$1000
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