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What Could Go
Wrong? - Tricks and Traps
by Lee Masterson
Simple Tricks
Banks are not nasty. They're just in business to make a
profit. Nothing more, nothing less. They aren't out to
rip you off. They're simply out to make a business
profit, pay their staff and keep their branches making
more money.
In the name of making that profit, however, bankers can
sometimes be brilliant at talking "Bankese"
- that's a secret banking language that only another
banker can understand. This means that the average
customer can often become confused by the terms they use
in order to sell you a loan product that you might not
really need.
By using this strange language, banks can often seem like
the bad guy to a regular customer, who might feel ripped
off or cheated.
Let me show you a real example, based upon the same
numbers used in our biweekly section:
Let's assume you call your local bank and tell them you
wish to make biweekly payments on your mortgage from now
on. Your friendly teller might be very helpful and
arrange for the change in payment frequency at once.
Easy, right?
This is where is gets a little more difficult.
In Bankese, the term fortnightly, or biweekly, means every second week
on the same day from the specified repayment commencement
date (or settlement date, if it's a new loan). In
Bankese, the term mortgage repayment
translates loosely into Profit Making.
So, when you ask to have your repayments altered to biweekly, the teller should do
exactly as she was trained to do - and divide your
monthly payments into "True BiWeekly Payments"
- which will mean you are NO better off
at all.
Let me show you...
We'll use our example loan to work out the numbers. Your
monthly repayments for a loan of $120,000 at 7.5% over 30
years are $839.06 per month. This means
the bank know they're going to get a minimum of
$10,068.72 per year (I just multiplied the minimum
monthly payment by 12).
Understand that the banks don't always want you to pay
extra on your repayments. If you pay extra, you're going
to get out of debt faster (meaning less potential profit
for them).
If we divide $10,068.72 by 26 fortnights, then your new
fortnightly payment will be $387.26 per
fortnight (instead of $419.53). At first glance, this
lower fortnightly payment looks great - but in reality it
can mean bad things...
If you pay the new fortnightly payment, then you should
still take precisely 30 years to pay off your loan, and
still have paid $302,061.60 by the end of the term.
That's no saving in interest at all and no
time cut off the term off your loan. The banks could
still get more out of you even when you think they're
helping!
Are you still with me?
To make things worse, if you are paying the "True
biweekly payments" of $387.26 per fortnight,
then you're not making a full monthly payment each month.
In fact you're only paying $774.52 per
month for those months where there are only two payments
due during that month.
More problems...
The bank expects you to pay a minimum of $839.06 per
month - meaning you've missed out on paying $64.54 for
that month. Only when the next 'three payment' month
arrives will you catch up.
Now - even though your friendly teller might have helped
you set up your new biweekly repayments, you will soon
find that after your first month of payments at True
Biweekly Payments , your loan is in ARREARS!
If you take some time to read through your mortgage
contract, you will soon learn how much your bank expects
to charge you in default fees and penalties if you fall
into arrears.
At the time of this writing, my own bank expects to
charge me a $35 default fee for each month that I might
fall behind. On top of this, they will charge a 2%
penalty interest rate ON TOP OF my existing interest rate
until I catch up the payments.
How Much?
So - if your true payments don't cover the minimum
required monthly payment for let's say 4 months, then the
bank stands to charge you the following fees and
penalties:
4 x $35 default fee = $140
2% default interest = $169.97 per month x 4 = $679.88
That's a potential grand total of $819.88
in arrears penalties if you only paid the amount your
bank expected on true biweekly repayments. The bank could
stand to take a little more money from you - and your
loan gets paid of NO faster at all!
Don't forget, though - just because you catch up the
payment you fell short on earlier, doesn't mean you're
out of the woods. You STILL must repay the penalties as
well, and until you pay those, you could end up with even
more penalties on top.
How Do I Fix It?
It only takes a few minutes of your time to do your own
quick check on how much you should be paying. You can
visit our mortgage
calculators page and see for yourself how much
your real monthly payment should be -
and then divide that number by two. No
fancy calculations, no working out how many fortnights.
Just divide your expected minimum payment in half and
then pay it every second week.
If you pay HALF the minimum monthly payment due, you
could benefit by cutting your loan term down and saving
yourself thousands of dollars in interest. (see our biweekly section for more
details.)
When you go in (or call) to arrange your own payment
frequency, you should also be able to request a
predetermined payment amount, too.
Your predetermined payment amount is the amount YOU
choose to pay off your mortgage each fortnight. You are
free to tell the bank whatever figure you choose -
whether it's exactly half the minimum monthly payment, or
whether you choose to round that figure up, or even add a
little extra. It's up to YOU.
My Bank Won't Let Me...
Most banks are a lot more flexible than they would allow
you to believe. There is much truth in the saying "If
you don't ask, you don't get".
For example, if you don't ask a bank to change your
payments to biweekly, they're not likely to offer. With
most lending institutes, you must ask for certain options
on loans. If you wish your payments to be half of your
minimum payment (and NOT true biweekly), then you must
remember to ask.
Then remember to check that the amount being paid is
correct. Bank computers are still run by human beings,
who are still capable of making simple mistakes.
The same is true if you wish to make any extra payments.
They're not likely to offer to take extra money from you.
You must request the payment variation.
Also, your bank is not always going to offer you the very
BEST mortgage for YOUR situation
immediately. A Standard Variable loan could potentially
make more money for a bank branch, so unless you ASK what
other alternatives are available, they're not always
likely to offer them as a choice.
Remember - this is YOUR mortgage and it's going to affect
YOUR life, so ask lots of questions and don't be
satisfied until you learn the answer. The only silly
question is the one you DON'T ask.
Lee
Masterson is a freelance writer from South Australia and
is one of the founders of MortgageLoanHints.com. She has
worked in banking and finance for more than 10 years and
now spends much of her time trying to help people control
and manage their debt. You can find more of Lee's
articles here: http://www.mortgageloanhints.com
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