Definition
Payment Shock
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Payment shock refers to the sudden large increase in mortgage payment that is so drastic that borrowers kpkb.
Because the majority of home loans in Singapore are paid via CPF and GIRO through personal bank accounts, changes in interest rates result in changes in required payment amounts that are directly deducted from borrower accounts.
There is no chance for a borrower to contest payments as borrowers don’t know exactly what amount would be debited before it happens. This is a big reason for payment shock in mortgages.
Changes in interest rates can be due to fluctuating indices.
But since index rate are often publicly available information, borrowers often know beforehand of a rate increase on the horizon.
It is borrowers who are on board rate home loans who most often run into payment shock scenarios.
This is because such types of loans allow lenders to change interest rates charged on their loan products however they like, whenever they like.
Whatever the case, if a lender is hardheaded enough to spike board rates, you can bet that they would not back down no matter how much complaints borrowers file.
When rate hikes are unfair, refinancing to another bank is an option that should be seriously considered.
It must be noted that payment shocks are not limited to rate increases but can occur with rate decreases as well.
This was the case during the negative SOR debacle in 2011 when the SOR index fell through the floor and went into negative territory.
That in theory meant that homeowners on SOR loans got paid by lenders for borrowing with them.
Those were interesting times.
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