Definition
Recast
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To recast a loan basically means to reset the amortization schedule so as to calculate a new recurring payment amount that is fully amortizing and achieves zero balance at the end of the tenure.
A housing loan that has been recast can either result in a lower or higher monthly debt obligation.
Loans are typically recast for 3 main reasons:
- Big changes in interest rates
- Negative amortization
- Adjustment to loan tenure
Recasting can occur due to a banks proactive actions, or by request from the borrower subject to the lender’s approval.
Change in interest rates
As all home loans issued by banks in Singapore eventually revert to a floating rate mortgage even when they start as fixed rate home loans, changes in interest rates are not unexpected.
But when index rates fluctuate wildly, the payment rate can sometimes see huge changes.
When this goes on for a prolonged period of time, the bank might find it necessary to recast the loan so that borrowers can have a better picture of how the payments are structured going forward.
Negative amortization
When negative amortization occurs, it essentially means that the principal on the loan is increasing rather than decreasing with each payment.
This can be due to various reasons like deferred interest or default interest.
Assuming that the lender and borrower has come to an agreement to avoid default processions, then the loan might be recast using the new outstanding loan amount to create a new fully amortizing schedule for the borrower.
Change in tenure
Borrowers can request an extension or reduction in loan tenor for various reasons.
When a lender accepts the request for changes, then the loan needs to be recast so as to generate a new loan repayment schedule for the borrower to follow.
A shorter tenure would generally mean a higher monthly payment amount, while a longer tenure would result in a lower monthly payment obligation.
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