Borrowers Beware of Repayment Traps
Mortgage holders need to fully understand the type of additional home loan repayments they agree to or they can risk over-committing and possibly defaulting, says leading mortgage broker Loan Market.
Loan Market Melbourne broker Alexander Heifetz said while making extra repayments helped to pay off a housing loan sooner, there were a number of traps that loomed for unsuspecting borrowers.
“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,” he said.
“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.”
Mr Heifetz said lenders offer two types of fortnightly repayments – ‘true’ fortnightly repayments and ‘inflated’ fortnightly repayments.
“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,” he said.
“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.”
Mr Heifetz said understanding your home loan repayment structure was vital in the current climate of economic instability.
“If you lose your income for whatever reason and start missing mortgage payments, this is when the difference between repayment frequency becomes important,” he said.
Mr Heifetz said borrowers should seek professional advice from a mortgage broker to ensure they are employing the most suitable home loan type and product.
True fortnightly repayments of $2,000 is calculated by $2,000 x 12/26 = $923
Inflated fortnightly repayments of $2,000 is calculated by $2,000/2 =$1,000