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.
Longer loan tenure also means that inflation would result in the monthly payment becoming more and more affordable in the future. A dollar today would be able to buy much more today than it would in the future.
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.
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.
This means that it might be a more pragmatic move to take on a long term tenure, and if you have extra funds in the future, use them for redemption.
This effectively helps the borrower to save on interest expense as well.
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