The tenure of a loan refers to the period for the entire life of the housing loan.
For example if a loan is for 30 years, the tenure of the loan is 30 years.
Sometimes also known as term, the tenure of a loan plays a more important part to a bank than most consumers think as it determines how to calculate amortization and monthly payments.
When the intention to stretch the tenure is to lower monthly payments, the reduction in monthly payments will become smaller and smaller the longer the tenure extends.
For example, the decrease in monthly payments will be much larger when increasing from 15 years to 20 years compared to increasing from 25 years to 30 years.
This is due to how interest rates are computed for home loans.
The most common tenure that home buyers select are 25 years or 30 years.
Changing tenure during the course of the mortgage
Banks prefer that borrowers stay with the terms of a original loan and can sometimes put up resistance when borrowers want to increase or decrease their loan tenures.
Most would think that shortening a tenure will be easily acceptable by a lender as the borrower will be repaying the debt much faster.
However, reducing the loan will mean that they would eventually make a smaller profit from the borrower than initially anticipated.
Moreover, a shorter terms results in a larger monthly payment. Giving rise to the potential of delinquency and default.
This is why borrowers will be put through another round of underwriting and credit assessment to determine whether such requests for tenure change can be approved.
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