When the monthly installment payment on the mortgage is not enough to cover the actual interest incurred, the difference due becomes deferred interest which is added to the principal loan balance.
This results in a rise in the outstanding housing loan balance, also known as negative amortization.
This counter-intuitive event can occur when a borrower is on floating interest rates which adjust upwards frequently and the scheduled payments remain the same.
In such cases, lender might either demand an additional payment consisting of deferred interest, recast the monthly payment amount to take into account the new loan balance, or assuming the borrower keeps the loan for it’s entire life, have it settled at the end of the tenure.
Most loans are self-amortizing.
Meaning they auto-adjust to reflect any change interest rate, resulting in irregular monthly payment amounts.
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